Special Economic Zones

D I R E C T I O N S I N D E V E LO P M E N T
Trade
Special Economic Zones

Progress, Emerging Challenges,
and Future Directions
Thomas Farole, Gokhan Akinci
Editors
Progress, Emerging Challenges, and
Future Directions
Edited by
Thomas Farole Gokhan Akinci
International Trade Department Investment Climate Department
World Bank World Bank
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Contents
Acknowledgments xv
Contributors xvii
Abbreviations xix
Chapter 1 Introduction 1
Thomas Farole and Gokhan Akinci
Attracting Investment and Creating

Jobs: Old Models and New
Challenges 8
Moving from Static to Dynamic Gains:
Can SEZs Deliver Structural Change? 13
Social and Environmental Sustainability:
Emerging Issues For SEZs 17
Conclusion 19
Notes 19
References 20
v
vi Contents
PART I Attracting Investment and Creating

Jobs: Old Models and New Challenges 23
Chapter 2 The Thin End of the Wedge: Unlocking
Comparative Advantage through EPZs
in Bangladesh 25
Mustafizul Hye Shakir and Thomas Farole
Introduction 25
Historical Development of EPZs in Bangladesh 27
Performance 29
Key Success Factors 33
Challenges for the Future 38
Conclusion 43
Notes 44
References 45
Chapter 3 Success and Stasis in Honduras’ Free Zones 47

Michael Engman
Introduction 47
Historical Development of Free Zones in
Honduras 48
Performance 49
Key Success Factors 54
Challenges for the Future 61
Conclusion 65
Notes 67
References 68
Chapter 4 China’s Investment in Special Economic

Zones in Africa 69
Deborah Brautigam and Tang Xiaoyang
China’s Overseas Special Economic Zones:

Aims and Objectives 69
China’s Overseas Zones in Africa:
Current Situation 72
China’s Overseas Zones: Mechanisms 80
Progress, Challenges, and Potential 91
Appendix 4.A. China’s Official Overseas
Economic and Trade Cooperation Zones 96
Contents vii
Notes 97
References 98
Interviews 100
Chapter 5 Partnership Arrangements in the China-Singapore

(Suzhou) Industrial Park: Lessons for
Joint Economic Zone Development 101
Min Zhao and Thomas Farole
Background 101
Introduction to Suzhou Industrial Park 102
The Strategy of the Chinese and Singaporean
Governments 104
Partnership Structure 105
The Knowledge-Sharing Process 107
Challenges to the Partnership 110
Overcoming Partnership Challenges and
Implementing Innovations 113
Conclusion 115
Appendix 5.A. Selected Indicators:
Developments at SIP, 1994–2008 121
Appendix 5.B. SIP Timeline and Major Milestones 122
Notes 124
References 125
Chapter 6 SEZs in the Context of Regional Integration:

Creating Synergies for Trade and Investment 127
Naoko Koyama
Introduction 127
Regional Trade Agreements 129
Implication of RTAS for SEZs 134
Harmonization of SEZs: Beyond Tariff Issues 143
Conclusion 149
Appendix 6.A Regulations and Handbooks of
Regional Trade Agreements 150
Appendix 6.B Summary of Tariff-Related
Measures Taken by Regional Trade Agreements
for Special Economic Zone–Processed Goods 151
Notes 154
References 155
viii Contents
PART II Moving from Static to Dynamic Gains:

Can SEZs Deliver Structural Change? 157
Chapter 7 When Trade Preferences and Tax Breaks Are No
Longer Enough: The Challenge of Adjustment in
the Dominican Republic’s Free Zones 159
Jean-Marie Burgaud and Thomas Farole
Introduction 159
Free Zones in the Dominican Republic 162
Performance and the Challenge of Adjustment 166
The Policy Response 172
Current Situation and Conclusions 175
Notes 180
References 181
Chapter 8 Fostering Innovation in Developing Economies

through SEZs 183
Justine White
Introduction 183
SEZs as an Instrument for Innovation 184
The Need for Absorptive Capacity and
Local Linkages 189
A Staged Approach to Building an
Innovative SEZ 197
Conclusion 200
Notes 202
References 202
Chapter 9 Early Reform Zones: Catalysts for Dynamic

Market Economies in Africa 207
Richard Auty
Context 207
The Confused Definitions and Aims of
Special Economic Zones 210
Examples of Successful SEZs 214
The Potential Role of ERZs in Sub-Saharan Africa 220
Conclusions: ERZs and Economic Reform in
Sub-Saharan Africa 223
Contents ix
Note 224
References 224
Chapter 10 Planned Obsolescence? Export Processing

Zones and Structural Reform in Mauritius 227
Claude Baissac
Introduction 227
The Policy Environment 227
Overview of MEPZ Performance 230
Today’s Challenges 235
The MEPZ and Economic Reform 237
Conclusion 240
Notes 243
References 244
PART III Social and Environmental Sustainability:

Emerging Issues for SEZs 245
Chapter 11 The Gender Dimension of Special
Economic Zones 247
Sheba Tejani
Introduction 247
Background on Trade and Gender 248
The Economics of Female-Intensive
Production in SEZs 253
Evidence on Gender in SEZs 255
Quality of Female Employment in SEZs 262
Defeminization of Employment 266
Conclusion and Policy Implications 269
Notes 272
References 274
Chapter 12 Low-Carbon, Green Special Economic

Zones 283
Han-Koo Yeo and Gokhan Akinci
Introduction 283
Low-Carbon, Green SEZs: Overview 284
Low-Carbon (Green) SEZ Framework 287
x Contents
Low-Carbon, Green SEZs around the World:

Current Status and Future Trends 304
References 306
Index 309
Boxes
2.1 Incentives Offered in Bangladesh EPZs 37
2.2 The Labor Counselor Program 40
2.3 The Korean EPZ: The First Private EPZ in Bangladesh 42
2.4 The Economic Zones Act 43
3.1 Incentives in the Honduras Free Zones 50
3.2 San Pedro Sula: Key Agglomeration for the
Export Sector 58
3.3 The Critical Role of Domestic Investors in
Attracting FDI 60
3.4 Instituto Politécnico Centroamericano 65
4.1 Timeline: Tianjin TEDA in Egypt 75
4.2 Challenges in the Lekki Free Zone in Nigeria 93
5.1 SIP Free Trade Zone Development 116
7.1 The Apparel Sector in the Dominican Republic 160
7.2 Gulf and Western Establishes the Dominican Republic’s
First FZ in 1969 162
7.3 Profile of the Dominican Republic’s Free Zones in 2010 164
7.4 Grupo M Pioneered the Strategy of Production Sharing
between FZs in the Dominican Republic and Haiti 174
8.1 The First Modern SEZ, Shannon, Ireland 186
8.2 The Development of Backward Linkages:
A Successful and Less Successful Example 194
8.3 SEZs and Labor Circulation: A “Domestic Diaspora”? 195
8.4 A Tale of Two Countries: Investment Climate Reform 196
8.5 SEZs in Cambodia 199
10.1 Targeting Productivity Improvements in the EPZs 234
Figures
2.1 Exports (US$ millions) and Contribution to
National Exports (percent) of EPZ Enterprises 30
2.2 Employment Generation in EPZs
(Year-Wise and Cumulative) 32
Contents xi
2.3 Comparison of Average Wages and Benefits of

Unskilled Workers in SEZs 34
3.1 Employment in Free Zones 53
3.2 Gross Value of Production in Maquilas 63
5.1 Governance Structure of SIP 106
5.2 Current Ownership Structure of CSSD 108
6.1 Total Notifications Received by Year, 1948–2009 131
6.2 Network of Plurilateral Groupings in Africa
and Middle East 132
6.3 Evolution of the Share of Intra-PTA Imports in
Total Imports, 1970–2008 135
6.4 Classification of Various Tariff-Related Measures by RTA 140
7.1 Index of Growth (1995 = 100) in the Free
Zone Program 165
7.2 Free Zone Value Added (US$m) and Contribution
to GDP, 1995–2008 167
7.3 Free Zone Exports (US$ million) and Share of
National Exports 168
7.4 Index of Free Zone Exports: Textile versus Nontextile
(1995 = 100) 169
7.5 Comparative Growth in U.S. Imports of Knitwear by Key
Countries, 2004–08, and U.S. Imports of Apparel
and Textiles by Key Country, 2009 and 2010 170
7.6 Evolution of FZ Employment, 1969–2008 171
8.1 The Republic of Korea’s Gradual Buildup of
R&D Capacity 192
8.2 Island to Catalyst SEZs 200
8.3 SEZs from Linkages and Technological Capabilities to
Upgrading 201
10.1 Employment Data 230
10.2 Investment Data 231
10.3 Exports 232
10.4 Sectoral Share of Exports 233
10.5 Exports per Employment 233
10.6 Measures of Export Productivity 234
11.1 Female Share of SEZ Employment and Nonagricultural
Employment, 2005–06 258
11.2 Female Share of SEZ Employment and Nonagricultural
Employment in African Countries, 2009 259
xii Contents
11.3 Female Share of Employment in SEZs by Sector,

Select Countries, 2009 260
11.4 Female Share of Employers and Managers,
Select Countries, 2009 261
11.5 Female Intensity of Manufacturing Employment and
Manufacturing Value Added per Worker, Average
Annual Growth, Southeast Asia and Latin America,
1985–2006 268
12.1 Spectrum of Environmentally Sustainable Zones 285
12.2 Main Components of a Low-Carbon, Green SEZ
Framework 287
12.3 Trajectory of GHG Emission and Mitigation Target 289
12.4 Example: Some SEZ GHG Emission Structures by Sector 290
12.5 Example of Industrial Symbiosis Networking Map,
Republic of Korea 293
12.6 Global Greenhouse Gas Mitigation Marginal Cost
Curve Beyond 2030 Business-as-Usual 295
12.7 Low-Carbon, Green SEZ Policy Framework 298
Tables
1.1 Summary of Types of Zones 2
2.1 Summary of EPZs, 2009 28
2.2 Operating Enterprises in the EPZs by Sector, 2009 30
3.1 FDI in Manufacturing Activities 51
3.2 FDI in Manufacturing by Country of Origin 51
3.3 Value-Added Contribution by Manufacturing in
“Industry” and “Maquila Industry” 52
4.1 Structure of Investment in China-Africa SEZs 84
5.1 SIP Key Statistics 103
5.2 FDI Utilized, US$ Billion 112
8.1 Direct and Indirect Benefits of SEZs 185
8.2 Training for Workers in SEZs 191
8.3 Staged Approach to the Development of an SEZ:
The Shenzhen Case 201
8.4 Some Policies Aimed at Stimulating Innovation
through SEZs 202
9.1 Export Processing Zone Performance, Six Asian
Economies 212
9.2 Ratio of Firms, Workers and Profits to Urban Population
Share, Chinese Regions, 1996 219
Contents xiii
11.1 Female Wages as a Percentage of Male Wages in

Manufacturing 250
11.2 SEZ Exports as a Percentage of Total Exports 256
11.3 Total Employment and Female Share of Employment
in SEZs 257
12.1 Some Examples of CDM Projects of IDA Countries 302
12.2 Interlinkage between CDM and FDI 304
Acknowledgments
The editors extend their sincere gratitude to all the authors who took the
time to contribute to this volume. In addition, they thank the peer
reviewers whose comments and feedback provided invaluable guidance
to the authors and editors: Magdi Amin, Kishore Rao, Marilou Uy, and
Michael Wong. Thanks also are extended to others who provided com-
ments on the book or individual chapters, including Sumit Manchanda,
Martin Norman, Harun Onder, and José Guilherme Reis.
Thanks also to Cynthia Abidin-Saurman, Igor Kecman, Charumathi
Rao, Marinella Yadao, and Aimee Yuson for support on administrative
and financial matters, and to Stephanie Chen and Stacey Chow for sup-
port on publishing and marketing matters.
Finally, thanks to the Bank-Netherlands Partnership Program, which
provided the generous financial support under which this project was
conducted.
The book was produced under the overall supervision of Mona
Haddad (sector manager) and Bernard Hoekman (sector director) in the
International Trade Department of the World Bank.
xv
Contributors
Editors
Thomas Farole Senior Economist, International Trade
Department, World Bank, Washington, D.C.
Gokhan Akinci Lead Investment Policy Officer, Investment
Climate Department, International Finance
Corporation and World Bank, Washington,
D.C.
Other Contributing Authors

Richard Auty Senior Lecturer, Geography, University of
Lancaster, UK
Claude Baissac Secretary General, World Economic Processing
Zones Association and Executive Director,
Eunomix Consulting, Johannesburg, South
Africa
Deborah Brautigam Professor, International Development Program,
School of International Service, American
University, Washington, D.C.
xvii
xviii Contributors
Jean-Marie Burgaud Independent Consultant, trade and economic

development, Santo Domingo, Dominican
Republic
Michael Engman Economist, Finance and Private Sector
Development, Africa Region, World Bank,
Washington, D.C.
Naoko Koyama Project Leader, Dalberg Global Development
Advisors, Nairobi, Kenya
Mustafizul Hye Shakir Consultant, Finance and Private Sector
Development, South Asia Region, World Bank,
Washington, D.C.
Sheba Tejani PhD Candidate, Economics, New School for
Social Research, New York, NY
Justine White Operations Officer, World Bank Institute,
Washington, D.C.
Tang Xiaoyang Ph.D. Researcher, Philosophy Department,
New School for Social Research, New York,
NY
Han-Koo Yeo Senior Investment Officer, Investment Climate
Department, IFC and World Bank, Washington,
D.C.
Min Zhao Senior Economist, World Bank, Beijing, China
Abbreviations
ADOZONA Dominican Association of Free Zones

AFTA ASEAN Free Trade Area
ASEAN Association of Southeast Asian Nations
BAU business as usual
BEPZA Bangladesh Export Processing Zones Authority
BICF Bangladesh Investment Climate Fund
BPO business process outsourcing
BSCIC Bangladesh Small and Cottage Industries Corporation
CACM Central American Common Market
CADF China-Africa Development Fund
CBD Central Business District
CBI Caribbean Basin Initiative
CBTPA Caribbean Basin Trade Partnership Act
CCECC China Civil Engineering Construction Corporation
CCX Chicago Climate Exchange
CDM Clean Development Mechanism
CEMAC Economic and Monetary Community of Central Africa
CER Certified Emission Reduction
CNMC China Nonferrous Mining Company
xix
xx Abbreviations
CNZFE Consejo Nacional de Zonas Francas de Exportación

(National Free Zones Council of the Dominican
Republic)
COMESA Common Market for Eastern and Southern Africa
CSSD China-Singapore Suzhou Industrial Park Development
Company, Ltd.
DEDO Duty Exemptions and Drawback Office
DR-CAFTA Dominican Republic–Central American Free Trade
Agreement
EAC East African Community
ECCI Egypt-Chinese Corporation for Investment
ECOWAS Economic Community of West African States
EDB Singapore Economic Development Board
EFTA European Free Trade Association
EIA environmental impact assessment
EPA Economic Partnership Agreement
EPZ export processing zone
EPZDA Export Processing Zones Development Authority
ERZ early reform zone
ESCO energy service company
FDI foreign direct investment
FIDE Foundation for Investment and Development of Exports
FOCAC Forum on China-Africa Cooperation
FTA free trade agreement
FZ free zone
GAFI General Authority for Free Zones and Investment
GATT General Agreement on Tariffs and Trade
GCC Gulf Cooperation Council
GDP gross domestic product
GHG greenhouse gas
GVC global value chain
ICT information and communication technology
IFC International Finance Corporation
IFEZ Incheon Free Economic Zone
IFTZ Integrated Free Trade Zone
ILO International Labour Organization
INFOTEP Instituto Nacional de Formación Técnici Profesional
IPC Instituto Politécnico Centroamericano
IPR intellectual property rights
JICA Japan International Cooperation Agency
Abbreviations xxi
JSC China-Singapore Joint Steering Council

JTC Jurong Town Corporation
KCER Korea Certified Emission Reduction
LDC least-developed country
LED light-emitting diode
LFTZ Lekki Free Trade Zone
M&E monitoring and evaluation
MDC Main Development Company
MEDIA Mauritius Export Development and Investment
Authority
MEPZ Mauritius Export Processing Zone
Mercosur Southern Cone Common Market (Mercado Commún
del Sur)
MFA Multi-Fiber Arrangement
MFEZs Multi-Facility Economic Zones
MFN most-favored nation
MMM Mouvement Militant Mauricien
MNC multinational corporation
MOFCOM Ministry of Commerce
NAFTA North American Free Trade Agreement
NIC newly industrializing country
NPCC National Productivity and Competitiveness Council
PKCC Pingxiang Coal Group
PMSD Parti Mauricien Social Democrate
PPP public-private partnership
PTA preferential trade agreement
R&D research and development
RMB Renminbi
RPS renewable portfolio standards
RTA regional trade agreement
SACU South African Customs Union
SADC Southern African Development Community
SAFTA South Asian Free Trade Agreement
SCM (Agreement on) Subsidies and Countervailing Measures
SEZ special economic zone
SFADCo Shannon Free Airport Development Company
SIP China-Singapore Suzhou Industrial Park
SIPAC Suzhou Industrial Park Administrative Committee
SME small and medium enterprise
SOE state-owned enterprise
xxii Abbreviations
SPF SIP Provident Fund System

SPO Software Project Office
t CO2e tons of carbon dioxide emissions
TEDA Tianjin Economic-Technological Development Area
TFP total factor productivity
TVE township and village enterprise
UNFCCC United Nations Framework Convention for Climate
Change
VAT value added tax
WAEMU / West African Economic and Monetary Union (Union
UEMOA Économique et Monétaire Ouest-Africaine)
WTO World Trade Organization
ZIP Zonas Industriales de Procesamiento
ZOLI Zona Libre
CHAPTER 1
Introduction
Thomas Farole and Gokhan Akinci
Ask three people to describe a special economic zone (SEZ) and three
very different images may emerge. The first person may describe a
fenced-in industrial estate in a developing country, populated by footloose
multinational corporations (MNCs) enjoying tax breaks, with laborers in
garment factories working in substandard conditions. In contrast, the
second person may recount the “miracle of Shenzhen,” a fishing village
transformed into a cosmopolitan city of 14 million, with per capita gross
domestic product (GDP) growing 100-fold, in the 30 years since it was
designated as an SEZ. A third person may think about places like Dubai
or Singapore, whose ports serve as the basis for wide range of trade- and
logistics-oriented activities.
In fact, all three of these are correct descriptions of this diverse instru-
ment: Table 1.1 provides a brief summary of the different types of zones
in existence. This table highlights the many ways in which the concept of
“special” economic zones has been operationalized and underscores the
challenge of attempting to say anything specific about such a heteroge-
neous policy tool. But despite the many variations in name and form, all
SEZs can be broadly defined as—
1
2
Table 1.1 Summary of Types of Zones

Development
Type of zone objective Typical size Typical location Activities Markets Examples
Free trade zone Support trade <50 hectares Port of entry Entrepôt and Domestic, Colon Free Zone
(commercial-free trade-related re-export (Panama)
zone) activity
Traditional EPZ Export <100 hectares None Manufacturing or Mostly export Bangladesh,
manufacturing other processing Vietnam1
Free enterprises Export No minimum countrywide Manufacturing or Mostly export Mauritius, Mexico
(single unit EPZ)2 manufacturing other processing
Hybrid EPZ Export <100 hectares; None Manufacturing or Export and La Krabang,
manufacturing only part of area other processing domestic Thailand
is EPZ
Freeport/SEZ Integrated >1,000 hectares3 None Multiuse Internal, domestic, Aqaba, Shenzhen
development and export
Sources: Derived from FIAS (2008) and Farole (2011).
Note: EPZ = export-processing zone; SEZ = special economic zone.
1. Bangladesh passed a new Economic Zones Act in 2010 that will open up the potential of zone activities beyond the traditional EPZs; Vietnam has various forms of economic zones,
among which are EPZs.
2. Many EPZ programs offer licenses for both EPZ industrial parks and “single unit” EPZs. Examples include Dominican Republic, Honduras, and Kenya.
3. Some multiuse SEZs, particularly those that do not include a resident population, may be smaller in scale.
Introduction 3
demarcated geographic areas contained within a country’s national bound-

aries where the rules of business are different from those that prevail in the
national territory. These differential rules principally deal with investment
conditions, international trade and customs, taxation, and the regulatory
environment; whereby the zone is given a business environment that is
intended to be more liberal from a policy perspective and more effective
from an administrative perspective than that of the national territory.
(Farole 2011, p.23)
In this book, we use SEZ as a generic expression (as per FIAS, 2008)
to describe the broad range of modern economic zones discussed in this
book (see table 1.1). But we are most concerned with two specific forms
of those zones: (1) the export processing zones (EPZs) or free zones (zona
francha in our case studies on Honduras and the Dominican Republic),
which focus on manufacturing for export; and (2) the large-scale SEZs,
which usually combine residential and multiuse commercial and indus-
trial activity. The former represents a traditional model used widely
throughout the developing world for almost four decades. The latter rep-
resents a more recent form of economic zone, originating in the 1980s in
China and gaining in popularity in recent years. Although these models
need not be mutually exclusive (many SEZs include EPZ industrial parks
within them), they are sufficiently different in their objectives, invest-
ment requirements, and approach to require a distinction in this book.
SEZs have a long-established role in international trade. Entrepôts and
citywide free zones that guaranteed free storage and exchange along
secure trade routes—such as Gibraltar, Hamburg, and Singapore—have
been operating for centuries. The first modern industrial free zone was
established in Shannon, Ireland, in 1959.1 Before the 1970s, most zones
were clustered in industrial countries. But since the 1970s, starting with
East Asia and Latin America, zones have been designed to attract invest-
ment in labor-intensive manufacturing from MNCs. These zones became
a cornerstone of trade and investment policy in countries shifting away
from import-substitution policies and aiming to integrate into global
markets through export-led growth policies.
SEZs normally are established with the aim of achieving one or more
of the following four policy objectives (FIAS 2008):
1. To attract foreign direct investment (FDI): Virtually all zones programs,

from traditional EPZ to China’s large-scale SEZs aim, at least in part,
to attract FDI.
4 Special Economic Zones
2. To serve as “pressure valves” to alleviate large-scale unemployment: The

SEZ programs of Tunisia and the Dominican Republic are frequently
cited as examples of programs that have remained enclaves and have
not catalyzed dramatic structural economic change, but that neverthe-
less have remained robust, job-creating programs.
3. In support of a wider economic reform strategy: In this view, SEZs are a
simple tool permitting a country to develop and diversify exports.
Zones reduce anti-export bias while keeping protective barriers in-
tact. The SEZs of China; the Republic of Korea; Mauritius; and Taiwan,
China, follow this pattern.
4. As experimental laboratories for the application of new policies and
approaches: China’s large-scale SEZs are classic examples. FDI, legal,
land, labor, and even pricing policies were introduced and tested first
within the SEZs before being extended to the rest of the economy.
In achieving these objectives, SEZs have had a mixed record of success.

Anecdotal evidence turns up many examples of investments in zone
infrastructure resulting in “white elephants,” or zones that largely have
resulted in an industry taking advantage of tax breaks without producing
substantial employment or export earnings. Moreover, many of the tradi-
tional EPZ programs have been successful in attracting investment and
creating employment in the short term, but have failed to remain sustain-
able when labor costs have risen or when preferential trade access no
longer offers a sufficient advantage. Empirical research shows that many
SEZs have been successful in generating exports and employment, and
come out marginally positive in cost-benefit assessments (cf. Chen 1993;
Jayanthakumaran 2003; Mongé-Gonzalez, Rosales-Tijerino, and Arce-
Alpizar 2005; Warr 1989). Many economists, however, still view zones as
a second- or even third-best solution to competitiveness, whose success is
restricted to specific conditions over a limited time frame (Hamada 1974;
Madani 1999; World Bank 1992). Concerns also have been raised that
zones, by and large, have failed to extend benefits outside their enclaves
or to contribute to upgrading of skills and the production base (cf.
Kaplinsky 1993).
A number of examples, however, also illustrate the catalytic role zones
play in processes of economic growth and adjustment processes (cf.
Johansson and Nilsson 1997; Willmore 1995). For example, many of the
zones established in the 1970s and 1980s in East Asia’s “tiger economies”
were critical in facilitating their industrial development and upgrading
processes. Similarly, the later adoption of the model by China, which
Introduction 5
launched SEZs on a scale not seen previously, provided a platform for

attracting FDI and not only supported the development of China’s export-
oriented manufacturing sector, but also served as a catalyst for sweeping
economic reforms that later were extended throughout the country. In
Latin America, countries like the Dominican Republic, El Salvador, and
Honduras used free zones to take advantage of preferential access to U.S.
markets and have generated large-scale manufacturing sectors in econo-
mies that previously were reliant on agricultural commodities. In the
Middle East and North Africa, SEZs have played an important role in
catalyzing export-oriented diversification in countries like the Arab
Republic of Egypt, Morocco, and the United Arab Emirates. And in Sub-
Saharan Africa, Mauritius is an example of zones operating as a central
policy tool supporting a highly successful process of economic diversifica-
tion and industrialization.
Although the nature, scale, and scope of their success or limitations
will no doubt continue to be debated for decades to come, what is clear
is that the attraction to policy makers of SEZs as an instrument of trade,
investment, industrial, and spatial policy is undiminished. In fact, since
the mid-1980s, the number of newly established zones has grown rapidly
in almost all regions, with dramatic growth in developing countries. For
example, in 1986, the International Labour Organization’s (ILO’s) data-
base of SEZs reported 176 zones in 47 countries; by 2006, this number
rose to 3,500 zones in 130 countries (Boyenge 2007), although many of
these zones are single companies licensed indiviudally as free zones. SEZs
now are estimated to account for more than US$200 billion in global
exports and employ directly at least 40 million workers (FIAS 2008).
This rapid expansion in SEZs is happening in the midst of substantial
changes in the macro context in which they are situated. Most important,
the global trade and investment environment is changing in a way that
may no longer support the traditional EPZ model. The rapid growth of
EPZ programs around the world over the last two decades, and their suc-
cess in contributing to export-led growth in regions like East Asia, is due
in part to an unprecedented globalization of trade and investment that
took place since the 1970s and accelerated during the 1990s and 2000s,
which saw trade grow 85 percent faster than GDP between 1983 and
2008. This growth was enabled by the vertical and spatial fragmentation
of manufacturing into highly integrated “global production networks,”
particularly in light manufacturing sectors like electronics, automotive
components, and especially apparel, which have accounted for the large
majority of investment in traditional EPZs. Especially for countries with
low labor costs, scale economies, and preferential access to major con-
sumer markets like the Europe, Japan, and the United States, economic
zones—with their access to duty-free inputs, quality, flexible infrastruc-
ture, and often generous fiscal incentives—proved to be a powerful instru-
ment through which to capture increasingly mobile foreign investment.
This era may well have come to an end, however, for several reasons.
Although trade has recovered significantly from the depths of the 2008
and 2009 economic crisis, it is clear that the United States and European
economies can no longer be the ony engines of global demand.
Responding in part to the crisis as well as longer-term strategic trends,
lead firms in global production networks are increasingly consolidating
their supply chains, both in terms of suppliers and production locations.
Much of this consolidation increasingly is being entrenched in “factory
Asia.” Linked closely to the issues discussed thus far, the expiration of the
Multi-Fiber Arrangement (MFA)2 at the end of 2004 has had a huge
impact on the cost competitiveness of textile and apparel manufacturing
in EPZs in Latin America, Africa, and Eastern Europe in relation to low-
cost Asian producers.
Thus, for countries that have not yet established economic zones pro-
grams, the traditional variety targeting multinational assembly activities
within global production networks is far from the sure thing that it used to
be. In the absence of massive labor cost advantages (e.g., Bangladesh and
Vietnam) or scale (e.g., China), most countries will need to design more
sophisticated strategies—beyond the basic EPZ—to attract MNCs. For
countries that already have established EPZ programs, the challenge is
perhaps more acute. It is about remaining competitive, which in the
absence of aggressive, long-term dampening of real wages, means upgrading
production capabilities and attracting investment in higher value-added
activities. But, as we will see from the examples in Parts I and II of this
book, this is precisely where the EPZ models have often let down countries
by creating an incentive environment that restricted adjustment processes.
Indeed, recent years have seen a shift away from the traditional EPZ
model. In its place, zone development is moving toward the SEZ model,
with emphasis on physical, strategic, and financial links between the zones
and local economies, and a shift away from fiscal incentives to value added
services and a greater focus on differentiation through the investment
climate in the zone. Although many of these zones eschew the narrow
focus of traditional EPZs in favor of multiuse developments encompassing
industrial, commercial, residential, and even tourism activities, others are
moving to highly specialized developments focused on specific high-end
Introduction 7
services like information and communication technology (ICT) and bio-

tech. Another notable trend has been the growing importance of zones
that are privately owned, developed, or operated (FIAS 2008).
In the postcrisis environment, in which competition for FDI likely will
remain much more intense than it has been in the past, SEZs likely will
continue to grow in importance. But it is not the existence of an SEZ
regime, of a master plan, or even of a fully built-out infrastructure that
will make the difference in attracting investment, creating jobs, and gen-
erating spillovers to the local economy. Rather, it is the relevance of the
SEZ programs in the specific context in which they are introduced, and
the effectiveness with which they are designed, implemented, and man-
aged on an ongoing basis, that will determine success or failure.
But recognizing the importance of context should not mean approach-
ing each situation anew, ignoring the substantial body of knowledge that
has been built up over the past three decades on what determines success
in implementing SEZs. While this book cannot hope (and does not
attempt) to provide any such thorough review of the state of the art in
SEZ knowledge, it is designed to offer policy makers, practitioners, and
researchers with an interest in SEZs (and trade and investment policy
more widely) a chance to take stock of the past and current role of SEZs,
and their potential for the future. Combining theoretical discussions with
practical examples from the field, through the use of case studies from
(mainly developing) countries around the world, the book will discuss
some of the well-known challenges facing both traditional EPZs and
newer SEZs around the world and also will look forward to some of the
emerging issues in the field, which will not only present further chal-
lenges to many SEZ programs, but will also open up new opportunities.
Specifically, the book is structured around exploring three main issues
of critical interest to policy makers:
1. How to make economic zones successful in attracting firms that create jobs:
This could be called a first-order or static measure of success.
2. How to ensure that zones are economically sustainable and deliver positive
externalities, including facilitating upgrading and structural transformation
and catalyzing economic reforms: This could be called a dynamic mea-
sure of success.
3. How to ensure that economic zones are sustainable from an institutional,
social, and environmental perspective: This means not only minimizing
negative externalities but, if possible, delivering noneconomic benefits
to the society.
Using this framework, the book is organized in three parts. Part I:

Attracting Investment and Creating Jobs: Old Models and New Challenges
includes case examples from South Asia, Latin America, and Africa com-
bined with a technical discussion of new issues in the trade environment
that will offer both opportunities and challenges for first-order success.
Part II: Moving from Static to Dynamic Gains: Can SEZs Deliver Structural
Change? follows a similar approach, combining case examples highlighting
the challenges with discussions of models for delivering dynamic benefits
from SEZs. Part III: Social and Environmental Sustainability: Emerging Issues
for SEZs discusses the issues related to gender and labor, as well as envi-
ronmental sustainability.
The remainder of this chapter discusses the themes of these sections
in more detail and summarizes some of the main findings and policy
conclusions based on the contributions in this book.
Attracting Investment and Creating Jobs:

Old Models and New Challenges
The fundamental benefits of SEZs derive from their role as instruments
of trade and investment policy. These static benefits result from capturing
the gains from specialization and exchange. They include employment
creation, the attraction of FDI, the generation of foreign exchange
through exports, and the creation of economic value added. Traditional
EPZs were designed to capture these benefits by enabling countries to
better exploit a key source of comparative advantage (low-cost labor)
that otherwise was underutilized because of low levels of domestic
investment and barriers (regulatory, infrastructure, etc.) preventing FDI.
These EPZs have operated under simple principles: allowing investors to
import and export free of duties and exchange controls, facilitating licens-
ing and other regulatory processes, and usually freeing these firms from
obligations to pay corporate taxes, value added taxes (VAT), or other local
taxes. To maintain control, EPZs normally have been fenced-in estates
with strict customs controls at entry, and sales are typically restricted
mainly to export markets.
The model has been extremely successful in many countries. For
example, it allowed the Dominican Republic to create more than 100,000
manufacturing jobs and shift dramatically away from reliance on agricul-
ture. Similar stories of industrialization and job creation can be seen in
Mauritius, the Republic of Korea, and Taiwan, China; in Honduras, El
Salvador, and Madagascar; and more recently in Bangladesh and Vietnam.
Introduction 9
It is clear, however, that the model is now increasingly reaching its limits.
Indeed, it is perhaps no longer fit-for-purpose, given the changing mac-
roeconomic and regulatory environment in the global economy. This
creates significant challenges for developing countries that are in the
early stages of developing their zone programs. As we will see from the
case studies in Part I, some of the basic principles at the heart of tradi-
tional EPZs are no longer (or perhaps never were) sustainable sources of
competitiveness.
But regardless of the model, it is also apparent that some countries have
been more successful than others in using zones to attract FDI, to encour-
age export-oriented production, and to create jobs. Indeed, reviewing the
experience of economic zones across many countries over the past three
decades, some clear principles emerge regarding the policies and practices
that are associated with static success. The case studies in part I—of
Bangladesh and Honduras, and of the experience of the recent Chinese
investments in SEZs in Africa—highlight many of these principles.
In chapter 2, we examine Bangladesh, a country that perhaps high-
lights the contrasting recent fortunes between zones programs in low-cost
Asian countries and those that have been established in Latin America
and Africa. Mustafizul Hye Shakir and Thomas Farole describe how
Bangladesh’s EPZ program has become part of the latest wave of benefi-
ciaries from multinational outsourcing in the classic low-wage-based gar-
ment sector. While the expiration of the MFA (for the garment sector)
and the continuing trend of tariff liberalization has eroded the benefits of
trade preferences for most zone programs, wage-based competitiveness
can still be critical in many sectors. The case of Bangladesh emphasizes
the importance of positioning the zone program to leverage the country’s
comparative advantage. Indeed, while the program in Bangladesh initially
aimed to attract high-technology investment, it took off only when it
made a concerted effort to focus on the garments sector, in which it had
a clear comparative advantage. The case of Bangladesh also highlights
another observation about SEZs—that is, their incubation period. Even
the biggest SEZ success stories like China and Malaysia started slowly and
took at least 5 to 10 years before they began to build momentum. In
Bangladesh, the program started in the early 1980s, but it only began to
attract investment on a large scale in the early 1990s (a similar evolution
is seen the Honduras case study). From a policy perspective, this means
that governments need to be patient and to provide consistent support to
zone programs over long time periods, a particular challenge in countries
whose political cycles are rather shorter.
Beyond the wage-based advantages of Bangladesh, the critical contri-

bution of the zones program was not, in fact, incentives (which exist but
are relatively modest in global terms), but rather the provision of serviced
industrial land infrastructure and relatively reliable supply of power.
Indeed, recent research (Farole 2011) shows that on a global basis
infrastructure reliability has a significant impact on SEZ success, while
incentives have no measurable effect.
The test of success for Bangladesh will be whether it can continue to
attract investment in the program in the face of rising wages.3 The recent
adoption of a modern Economic Zones Act in 2010, which opens up
greater potential for private sector participation and for zones of various
forms, and the adoption of programs to address labor and environmental
issues, suggests that efforts are being made to modernize and diversify the
program to ensure that it avoids stagnation.
In chapter 3, Michael Engman relates the case of Honduras, which has
also been highly successful in attracting investment in the garment sector,
but has faced challenges in maintaining competitiveness. Although the
Honduran free zone program was built on the back of trade preferences,
labor cost arbitrage, and a certain amount of good timing, this was just a
starting point. The case study shows the critical importance of dynamic
local entrepreneurs in catalyzing foreign investment (indeed, the success
in Bangladesh also may be partly attributed to local investors, avoiding a
reliance simply on footloose FDI).
Beyond this, the case study highlights three additional critical factors
for successful zone programs. First is the role of the private sector.
Although it is too simplistic to say that private sector development of
zones is better than public sector development (bearing in mind the suc-
cess of many East Asian countries and of Mauritius with public sector–led
models), the private sector can be much more dynamic in implementing
zones in many countries and, regardless, is an important source of exper-
tise and risk management. In the case of Honduras, a stagnant government-
run zones program was transformed when the law was changed to allow
for private developments of zones. Second, the government focused on
providing not only the regulatory framework in which the private sector
thrived, but also critical infrastructure and services, most notably a high-
quality port and road connections to the zones. Finally, it provided effec-
tive on-site customs services that allow investors efficient import and
export procedures.
Ironically, as Engman points out in chapter 3, some of these sources of
competitiveness may also prevent the zones program from diversifying
Introduction 11
outside the garment sector. Specifically, it relies on investors that are

entrenched in the garment sector (most zone developers are not real estate
developers but rather garment manufacturers). Moreover, the privileges
long enjoyed by the sector have become a powerful disincentive for
reform, which has acted as a brake on innovation and competitiveness.
Surely China is at the top of any list of success stories in attracting
investment and promoting exports through SEZs. At the bottom of the
list probably sits Africa, where, outside of Mauritius (and partial success
in Kenya, Lesotho,4 and Madagascar), most zones initiatives have been
failures. In chapter 4, Deborah Brautigam and Xiaoyang Tang explore a
recent development that seeks to leverage the Chinese model to create
successful zone development in Africa. Specifically, they look at the
recent Economic and Trade Cooperation Zones, an initiative which the
Chinese government is supporting in six African countries. These initia-
tives have high-level government support and are implementing proven
successful models (ironically, with one major difference—that is, they are
being led by private developers5 rather than by provincial and local gov-
ernments). Although most of these zones remain in the early stages of
development, troubling signs have emerged that highlight some impor-
tant lessons in zone development.
First, it is important to separate political support from political
objectives in zone projects. Although strong commitment from the
government is needed, projects must be designed carefully on the basis
of clear strategic plans. The commercial case must be present. Moreover,
that commercial case must be based on sustainable sources of com-
petitiveness, not on fiscal incentives. Second, despite the concept of
zones as enclaves, in practice, their success is almost fully entwined
with the competitiveness of the national economy and the national
investment environment. Most of the Chinese zone projects in Africa
are operating in an environment of poor national competitiveness
(weak local and national value chains). Regardless of what is done
inside the walls of the zones, these projects face challenges in linking
the zones and global markets, including critical infrastructure like ports,
roads, and electricity.
Third, the policy and legal framework in which they operate, and their
de jure implementation, are critical. An effective legal and regulatory
framework is a necessary first step to zone program development. Putting
in place a clear and transparent legal and regulatory framework codifies
the program strategy and establishes the rules of the game for all
stakeholders involved in the process. This framework plays a fundamental
role in addressing often-difficult land issues, facilitating the provision of

the required infrastructure, and ensuring compliance with labor and envi-
ronmental standards. But de facto implementation is of equal importance.
In many of the African SEZs involved in the Chinese developments
discussed in chapter 4, the authority responsible for developing, promot-
ing, and regulating the program lacks resources and capacity to carry out
its mandate. Of equal importance, it often lacks the institutional author-
ity to do so. The lack of a clear and transparent legal and regulatory
framework and an authority with the capacity to enforce it has led to
disputes and delays in several of the projects.
One critical aspect of the Chinese Trade and Economic Cooperation
Zones is their potential to transfer knowledge to developing-country gov-
ernments on how to effectively plan and manage the implementation of
SEZ programs. In fact, one the principal determinants of success or failure
of SEZ initiatives has little to do with EPZ or SEZ models and much to
do with the strategic planning, project implementation, and management
capabilities of governments and their zone regulatory authorities specifi-
cally. With this in mind, chapter 5 looks back at China’s own experience
in establishing SEZs, during which it took advantage of similar turnkey
partnerships to learn from the expertise of other countries. Min Zhao and
Thomas Farole present the case of the partnership between China and
Singapore in development the Suzhou Industrial Park (SIP), which is a
telling example of how host governments in Africa and elsewhere should
approach zone partnerships to take advantage of the learning opportuni-
ties and set the stage for the sustainable development and management of
zones programs. The case study highlights a number of key principles for
success of partnership initiatives and zone program institutional develop-
ment more widely, including (1) the importance of high-level political
commitment; (2) the need to align fiscal incentives among all partners
(including local government); (3) the need to balance investments in
infrastructure with a strong focus on “software”; and (4) the critical
importance of putting in place an institutionalized process for learning and
knowledge transfer between partners. Although the SIP partnership was
not without its problems, the proactive, institutionalized approach to
learning in the partnership played a critical role in ensuring that the host
government took maximum advantage of the SEZ opportunity.
In addition to the competitive challenges emanating from the chang-
ing macroeconomic environment, economic zones (particularly, again,
the traditional EPZ model) also are facing threats from changing
regulatory environments. In chapter 6, Naoko Koyama highlights how
Introduction 13
one particular regulatory issue—the growing importance of regional

preferential trade agreements—presents both challenges and opportuni-
ties for zones programs. Although the multilateral trade agenda has failed
in recent years, bilateral and regional trade agreements are growing rap-
idly around the world. Many regional blocs are making substantial prog-
ress in integration efforts. A consequence of this progress is that the rules
around which many traditional EPZ regimes were based suddenly may
change. If an EPZ is prohibited from selling to the domestic market, but
suddenly the regional trade agreement makes its neighboring countries
“domestic” from a customs perspective, this change will have an enor-
mous impact on the business model of investors and on the attractive-
ness of zones. From an institutional perspective, it will be increasingly
critical for zone programs to look beyond their borders and develop
integrated or at least harmonized approaches to SEZ legal and regulatory
frameworks, most notably on the treatment of exports, rules of origin,
and fiscal incentives.
But beyond the regulatory issues, Koyama’s chapter also highlights
another critical factor to the success of zones programs—that is, market
access. One of the clear findings from research on SEZs (and on FDI
in general) is that market access is often the number one investment
location determinant. Koyama points out that regional agreements for
smaller countries, particularly in Africa, offer the potential advantage of
scale that these countries otherwise would not have. This is clear for
export markets; but perhaps more important, Koyama discusses the
potential for using zones to link up regional suppliers and leverage
economies of scale in production. Indeed, linking regional SEZs to infra-
structure investments to create growth corridors may be a powerful new
route to competitiveness.

Can SEZs Deliver Structural Change?
Economic zone programs that are successful in contributing to long-term
development go beyond the static benefits of attracting investment and
generating employment. They leverage these static benefits for the crea-
tion of dynamic economic benefits. Ultimately, this means contributing to
structural transformation of the economy, including diversification,
upgrades, and increased openness. Critical to this process is the degree of
integration of zones in the domestic economy. Countries that have been
successful in deriving long-term economic benefits from their SEZ
programs have established the conditions for ongoing exchange, and the
accompanying hard and soft technology transfer, between the domestic
economy and investors based on the zones. This includes investment by
domestic firms into the zones, forward and backward linkages, business
support, and the seamless movement of skilled labor and entrepreneurs
between the zones and the domestic economy.
From a policy perspective, this suggests shifting from a traditional
fenced-in EPZ model to an SEZ model that eliminates legal restrictions
on forward and backward links and domestic participation. But it also will
require implementation of much broader policies beyond the scope of
any SEZ program, including the following: promoting skills development,
training, and knowledge sharing; promoting industry clusters and target-
ing links with zone-based firms at the cluster level; supporting the inte-
gration of regional value chains; supporting public-private institutions,
both industry specific and transversal; and ensuring labor markets are free
to facilitate skilled labor moving across firms.
Chapter 7 presents the example of the Dominican Republic, one of
the pioneers in establishing economic zones programs in the Western
Hemisphere. Jean-Marie Burgaud and Thomas Farole illustrate how the
traditional EPZ model initially had a transformative impact on the
Dominican Republic, not just in terms of investment, exports, and jobs
but also in shifting the economy radically away from a reliance on
agricultural commodities. At its peak, the zones program contributed
7.5 percent of total GDP and was responsible for 90 percent of the
country’s exports.
However, the nature of the zone regime, including its reliance on fiscal
incentives and wage restraint, and its enclave nature, which contributed
to its prolonged failure in establishing significant forward and backward
links with the Dominican economy, ultimately condemned it to an
inevitable deterioration of competitiveness. Indeed, the recent macroeco-
nomic trends discussed earlier in this chapter have accelerated these
processes so that the competitiveness gap is now too large to be closed by
the “artificial sources” of the EPZ regime, exposing the adjustment chal-
lenge for the zones program.
The case of the Dominican Republic highlights that while low labor
costs, trade preferences, and fiscal incentives each can play a role in cata-
lyzing a zone program, they are almost never sustainable. Indeed, they
create pressure for further distortions and race-to-the-bottom policies,
including extending and increasing incentives (rather than addressing
more difficult factors of the investment environment) and granting
Introduction 15
exemptions on minimum wage and labor rights (rather than addressing

productivity or labor market rigidities).
For the Dominican Republic, and many other lower middle-income
countries whose zones programs have focused on basic assembly manu-
facturing and trade, the main growth opportunities are now in services
sectors, especially ICT, business services, and in more knowledge and
research and development (R&D)–intensive sectors. As Justine White
illustrates in chapter 8, this means fostering innovation. And this high-
lights the need for zones to avoid becoming enclaves and instead facilitate
an ongoing exchange with the local economy. Chapter 8 reinforces the
importance of skills development and training, bringing in examples not
only of the Shenzhen case, but also of the Republic of Korea, Malaysia,
and others. Finally, it establishes a clear set of guidelines for how to ensure
that an SEZ plays an ongoing role in fostering innovation, and brings in
rich examples of countries whose SEZ programs not only catalyzed a
process but also provided the necessary spark to fuel continuous innova-
tion and upgrading.
But facilitating structural transformation through SEZs is not a
mechanical process that simply requires the right policies. In fact, the
principal factors explaining why many countries have distorted eco-
nomic structures and lack sufficient dynamism are political in nature. In
many cases, political and economic elites benefit from the status quo and
thus have little interest in structural change. It is in this context that
SEZs can perhaps be most effective, in catalyzing processes of economic
reform. Indeed, this is the classic case of China’s SEZs, which were used
to test liberal economic reforms and to introduce them to the wider
economy in a gradual way. Thus, although the idea of integration
between SEZs and the domestic economy is ultimately the key to struc-
tural transformation, where economic reforms are politically sensitive to
implement, it is precisely the enclave nature of zones that can be their
key to success.
In chapter 9, Richard Auty explores this issue from a theoretical per-
spective, looking at the political economy of SEZs and their potential to
play a catalytic role in facilitating economic reform in environments in
which the barriers to such reform within the domestic economy are
substantial. Auty introduces the concept of early reform zones (ERZs) as
a dual-track strategy to overcome barriers to economic reform in rent-
distorted economies. Although his model is relevant in many situations,
perhaps most notably in natural resources driven economies, in chapter 9,
he discusses specifically the context of Sub-Saharan Africa, where many
economies have entrenched patronage systems that undermine reform,

resulting in stagnating competitiveness. Drawing lessons from the experi-
ences of China and Mauritius, as well as from Malaysia and others, Auty
points out that the ERZ approach turns the often-criticized enclave
nature of zones into “a virtue.” By using the enclave approach to address
reform, necessarily in isolation from the rent-distorted economy, it later
can allow for spillover and integration.
In chapter 10, Claude Baissac describes the case of Mauritius. He
argues that although the country is often cited as an example of EPZ
success, the true success story of the Mauritius EPZ program was not
job creation, investments, or exports per se, but rather the reform pro-
cess, both economic and (critically) political, that it catalyzed. It is this
reform that facilitated the structural transformation in the economy.
Several important lessons can be drawn from the Mauritius case. First,
it highlights the importance of the political process and the importance
of having a specific political champion behind the zones program, a les-
son that we also see from cases such as China and Malaysia (especially
Penang). Second, not only does the Mauritius case emphasize the
importance of domestic investment in the zones program, it shows that
integration of the zone program must go beyond the physical and
financial—it must also be integrated strategically. Indeed, one of the
main differences between zone programs that have been successful and
sustainable and those that have either failed to take off or have become
stagnant enclaves is the degree to which they have been integrated in
the broader economic policy framework of the country. In Mauritius,
the EPZ program featured as a pillar of the country’s development stra-
tegic. Zones generally have failed to have a catalytic impact in most
countries in part because they have been disconnected from wider eco-
nomic strategies. Zone programs often are put in place and then left to
operate on their own, with little effort to support domestic investment
into the zones, to promote links, training, and upgrading. Unlocking the
potential of zones requires strategic integration of the program along
with the government playing a leading, active role in potentiating the
impact of the zones.
Finally, Baissac observes that in the process of achieving adjustment,
the zones program effectively made itself obsolete. Although this is true,
it is important to note also that Mauritius continues to use instruments
of SEZs to promote emerging industries, such as ICT and financial ser-
vices, and indeed many argue that its duty-free island initiative effectively
turns the whole country into an SEZ. And so, although the Mauritius case
Introduction 17
suggests some life cycle of traditional EPZs, the instruments on which

they are based may remain relevant in facilitating the ongoing transfor-
mation process.
Social and Environmental Sustainability:

Emerging Issues For SEZs
Both measures of success discussed in part III—static and dynamic—are
concerned with economic efficiency alone. But SEZ impacts on host
societies go well beyond this. There has been much (mainly critical)
documentation of the social and environmental impacts of zones over the
years. It is important to recognize that these issues should not, in fact, be
viewed as completely segregated from the economic ones discussed
earlier. Indeed, over time social, environmental, and economic outcomes
are closely entwined. Zone programs that fail to offer opportunities for
quality employment and upward mobility of trained staff, which derive
their competitive advantage from exploiting low-wage workers, and
which neglect to provide an environment that addresses the particular
concerns of female workers are unlikely to be successful in achieving the
dynamic benefits possible from zones programs and likely will be forced
into a race to the bottom. By contrast, zone programs that recognize the
value of skilled workers and seek to provide the social infrastructure and
working environment in which such workers thrive will be in a position
to facilitate upgrading.
In chapter 11, Sheba Tejani addresses an issue that has important social
as well as economic implications for zones programs and the people who
work within them. Several studies of employment in SEZs have found that
firms located inside zones have a much higher share of women in their
work force relative to the overall economy. (Kusago and Tzannatos 1998;
Milberg and Amengual 2008; United Nations Centre on Transnational
Corporations-International Labour Organisation 1988). In this regard,
zones have created an important avenue for young women to enter the
formal economy. On the other hand, zones have long been criticized for
poor labor standards and, more generally, for failing to provide quality
employment for female workers. But, it also is critical to understand the
structural nature of the link between female workers and SEZs. Indeed,
it is not a direct one. SEZs do not attract female workers per se. But they
do attract the firms in sectors whose basis of competition is highly
dependent on the available supply of low-wage, flexible, and unskilled
or semiskilled workers, a set of requirements that often results in a
concentration of female workers due to prevailing social and cultural

conditions. These firms have been attracted to traditional zones in part
because they (1) minimize costs (through fiscal incentives and adminis-
trative efficiencies); (2) provide access to serviced land and more reliable
infrastructure; and (3) reduce the investment requirement, lowering risk
and providing operational and strategic flexibility.
So it is probably more appropriate to refer to sectors and tasks that are
gender concentrated rather than zones per se. This is important for more
than theoretical reasons. The evidence shows that as firms and zones
upgrade—both into higher value added sectors and to higher value added
activities within existing sectors—the share of females in the labor force
tends to decline. Thus, countries that remain reliant on traditional labor-
intensive, low-skilled activities will be forced in time to adjust, and it will
be critical to consider some of the economic and social implications these
adjustments may have.
Ensuring that the rights of workers are upheld and, beyond this, that
efforts are made to provide the training and social infrastructure needed
to enable individual workers to thrive, ultimately will be critical to ensur-
ing the sustainability of zones programs, and their potential to deliver the
dynamic economic benefits discussed previously. Thus, zone programs
will need to strengthen their approach to social and environmental com-
pliance issues, establishing clear standards and putting in place effective
monitoring and evaluation (M&E) programs. At a national policy level,
economic zones should be seen as opportunities to experiment with
policy innovations.
These same principles—of policy experimentation, clear standards,
and robust M&E—also are applicable in the environmental field. In
chapter 12, Han-Koo Yeo and Gokhan Akinci explore a seldom-discussed
issue in the zones literature, but one that will become increasingly criti-
cal in all economic policy discussions: climate change and the role of
SEZs in supporting environmentally friendly development and produc-
tion. Some zones have been criticized as promoting “dirty” industries and
failing to meet environmental standards. SEZs, however, offer an ideal
environment for environmental policy experimentation, not only
because of their enclave nature but also because they have built-in com-
pliance mechanisms that normally do not exist outside the zones, such
as the ability to issue licenses, to monitor firms in a short time frame,
and ultimately to revoke a license, terminate a lease, or impound con-
tainers. This context could offer interesting opportunities particular to
innovations in both social and environmental policy. As Yeo and Akinci
Introduction 19
discuss in chapter 12, the concept of developing low-carbon “green”

zones is in its infancy, but already is being adopted in many SEZs around
the world.
Conclusion
With more than 100 countries worldwide operating SEZ programs and
several thousand individual zones, it is perhaps not surprising that huge
diversity exists in terms of their objectives, design, and implementation.
As a result, policy makers, donors, and private sector investors have a vast
range of challenges and opportunities to consider. This book addresses
only a small set of them, but in doing so, it sets out a substantial policy
and operational agenda.
As SEZ programs continue to proliferate around the world, particu-
larly in developing countries, it will be critical for policy makers to learn
from past experiences and to anticipate the implications of the emerging
and future issues discussed in this book. Under the framework of attract-
ing investment and creating jobs, facilitating dynamic benefits, and ensur-
ing sustainability, this section set out a number of key principles for policy
makers to consider. There is no need to enumerate these principles here.
However, it is worth repeating that achieving success with SEZ programs
in the future will require adopting a more flexible approach to using the
instruments of economic zones in the most effective way to leverage a
country’s sources of comparative advantage, and to ensure flexibility to
allow for evolution of the zone program over time. Most fundamentally,
this will require a change in mind-set away from the traditional reliance
on fiscal incentives and wage restraint, and instead focusing on facilitating
a more effective business environment to foster firm-level competitive-
ness, local economic integration, innovation, and social and environmental
sustainability. It also will require proactive, flexible, and innovative policy
approaches to address today’s significant macroeconomic constraints and
the many unanticipated challenges that no doubt will shape the environ-
ment in the years to come.
Notes
1. However, a form of industrial free zone was established in Puerto Rico as
early as 1948 (Farole 2011).
2. The MFA, which originated in 1974, was a system of quotas and voluntary
export restrictions that resulted in quantitative restrictions on the textile and
garment exports used to protect the markets of the main importing countries
of Europe and North America.
3. The recent doubling of the minimum wage in the garment sector shows that
wage restraint is not likely to be a policy of the government.
4. Lesotho does not, in fact, operate any formal zones program.
5. Most of the developers are state-owned enterprises.
References
Boyenge, J. P. S. 2007. ILO Database on Export Processing Zones, Revised. Geneva:
International Labour Organization.
Chen, J. 1993. “Social Cost-Benefit Analysis of China’s Shenzhen Special
Economic Zone.” Development Policy Review 11 (3): 261–71.
Farole, T. 2011. Special Economic Zones in Africa: Comparing Performance and
Learning from Global Experiences. Washington, DC: World Bank.
FIAS (Foreign Investment Advisory Service). 2008. Special Economic Zones.
Performance, Lessons Learned, and Implications for Zone Development.
Washington, DC: World Bank.
Hamada, K. 1974. “An Economic Analysis of the Duty Free Zone.” Journal of
International Economics 4: 225–41.
Jayanthakumaran, K. 2003. “Benefit-Cost Appraisals of Export Processing Zones:
A Survey of the Literature.” Development Policy Review 21 (1): 51–65.
Johansson, H., and L. Nilsson. 1997. “Export Processing Zones as Catalysts.” World
Development 25 (12): 2115–28.
Kaplinsky, R. 1993. “Export Processing Zones in the Dominican Republic:
Transforming Manufactures into Commodities.” World Development 21 (11):
1851–65.
Kusago, T., and Z. Tzannatos. 1998. “Export Processing Zones: A Review in Need
of Update.” SP Discussion Paper 9802. Washington, DC: World Bank.
Madani, D. 1999. “A Review of the Role and Impact of Export Processing Zones.”
World Bank Policy Research Working Paper No. 2238. Washington, DC:
World Bank.
Milberg, W., & M. Amengual. 2008. Economic Development and Working Conditions
in Export Processing Zones: A Survey of Trends. Geneva: International Labour
Organization.
Mongé-Gonzalez, R., J. Rosales-Tijerino, and G. Arce-Alpizar. 2005. “Cost-Benefit
Analysis of the Free Trade Zone System: The Impact of Foreign Direct
Investment in Costa Rica.” OAS Trade, Growth and Competitiveness Studies,
Organization of American States, January.
Introduction 21
United Nations Centre on Transnational Corporations-International Labour

Organization. 1988. Economic and Social Effects of Multinational Enterprises in
Export Processing Zones. Geneva: International Labour Organization.
Warr, P. 1989. “Export Processing Zones: The Economics of Enclave Manufac-
turing.” The World Bank Research Observer 9 (1): 65–88.
Willmore, L. 1995. “Export Processing Zones in the Dominican Republic: A
Comment on Kaplinsky.” World Development 23 (3): 529–35.
World Bank. 1992. “Export Processing Zones.” Policy and Research Series No. 20.
PA R T I
Attracting Investment and Creating

Jobs: Old Models and New Challenges
CHAPTER 2
The Thin End of the Wedge:

Unlocking Comparative Advantage
through EPZs in Bangladesh
Mustafizul Hye Shakir and Thomas Farole
Introduction
Bangladesh is an extremely densely populated country (150 million
people living on less than 150,000 square kilometers). Despite this
density, the country relies mainly on agriculture to support the majority
of its population. Although Bangladesh has a historical reputation for
producing the finest quality textiles and jute products, and long has
been a hub for trade, the country has a low industrial and manufactur-
ing base. Jute was the main export of Bangladesh for decades: during
the 1950s to the 1960s, almost 80 percent of the world’s jute was pro-
duced in Bangladesh. However, from the 1970s onward, the global jute
industry faced a long period of decline as a result of the development
of synthetic substitutes.1 The gap in exports was filled by the textile and
garment sectors, which gained a quick foothold in international mar-
kets, taking advantage of Bangladesh’s low labor costs to attract inves-
tors from other Asian economies (particularly the Republic of Korea;
25
Taiwan, China; and Hong Kong SAR, China) that faced quotas resulting
from the MFA.
But the country’s phenomenal growth in garments was experienced
only in the last decade. Indeed, in the early 1980s, Bangladesh had only
50 garment factories, employing only a few thousand people. It was dur-
ing this time that the EPZ program was established—a move that would
prove to have a substantial impact in catalyzing the development of the
garment sector in the coming decades.
Bangladesh now has nearly 4,500 garment manufacturing units, employ-
ing almost 2 million workers (50 percent of the industrial workforce in
the country), and contributing 75 percent of the country’s total export
earnings (Bangladesh Bank 2009). Garment exports in Bangladesh have
continued to grow strongly despite the recent global economic crisis.
Although accounting for a minority of employment and exports, the
EPZs are at the heart of Bangladesh’s dynamic garment sector. By provid-
ing serviced land, a supporting infrastructure, a transparent and relatively
efficient regulatory environment, and a regime of incentives, the EPZs
have played a critical role in attracting large-scale FDI. This environment
has had a knock-on effect, catalyzing additional investment by domestic
entrepreneurs in recent years.
As of 2009, the EPZs in Bangladesh employ more than 200,000 and
account for a substantial share of national exports and investment.
However, the program faces a number of challenges going forward. Chief
among these challenges are how to maintain competitiveness while also
upgrading wages and working conditions for EPZ workers, and how to
achieve diversification outside of the garment sector. This diversification
will require changes in the zones program itself. Indeed, the traditional
EPZ model on which the program is based has become increasingly
archaic, and a number of reforms are necessary to ensure that it remains
an engine of economic growth into the future—in particular, private sec-
tor development and management of zones, implementation of World
Trade Organization (WTO)–consistent policy and incentive frameworks,
and more innovative regulatory frameworks. A new Economic Zones Act,
which was passed in July 2010, represents an important step in addressing
these challenges.
This chapter provides a brief history of the development of EPZs in
Bangladesh and discusses its successes and the factors that have contrib-
uted to it. It then assesses the key challenges facing the Bangladesh’s
export sector going forward and the role of the EPZs in addressing these
challenges.
The Thin End of the Wedge 27
Historical Development of EPZs in Bangladesh

Bangladesh’s EPZs were conceived of at a time when the trend among
many developing countries was to shift toward import substitution. The
industrial structure in Bangladesh was built around nationalized mills and
factories. With the loss of many jobs in the jute sector, however, the gov-
ernment was anxious to create jobs and was open to establishing a more
liberalized environment for trade and investment. The garment sector
appeared to offer the main source of hope for large-scale job creation.
Initially, this came through domestic entrepreneurs who invested in the
industry with a small-scale production base. In addition, a cadre of about
130 Bangladeshis, who were trained by the Daewoo Company in the
Republic of Korea, returned home and started brokering deals to accom-
modate foreign investment in the sector (e.g., buying houses and facto-
ries). These ex-Daewoo trainees, in conjunction with a few Sri Lankan
garment companies relocating during their country’s civil war, catalyzed
the growth of the sector.
The government was quick to recognize these signals from the private
sector. It acted decisively to take advantage of this opportunity by creat-
ing a secure environment for exporters to realize the industry’s potential.
With the initiation of the Foreign Investment (Promotion and Protection)
Act (1980), the foundations were set to attract foreign investment on a
large scale. Nevertheless, the issues with land accessibility and administra-
tive and logistical obstacles were a major hindrance to attracting invest-
ment. The establishment of EPZs was coined as an innovative and quick
way to deal with the issues while nationwide reforms were slowly unfold-
ing. The Bangladesh Export Processing Zone Authority (BEPZA) was
established in 1980 and the first EPZ was built in Chittagong in 1983.
The establishment of EPZs is quite remarkable for several reasons. The
concept of industrial serviced land was not new in the country, but never
before was any piece of land declared as “extraterritorial” and dedicated
to manufacturing of products for export. Significant changes were
brought into the fiscal incentives scheme and administrative procedures
for the import and export of goods. The range and quality of services
provided were superior to what was ever offered by any government
agency. The Bangladesh Small and Cottage Industries Corporation
(BSCIC) already operated a number of estates around the country,2
which catered to the small and midsize local entrepreneurs. However, the
BSCIC estates typically are small (less than 40 hectares), land is leased for
long periods (99 years), and the maintenance of the estates is minimal.
EPZs, on the other hand, typically are larger (the smallest ones are in
excess of 40 hectares), walled, secured, and considerably well maintained
and managed. Moreover, the package of incentives available in the new
EPZs for export-oriented activity was not available in any other industrial
estate in the country (see Section 3, Performance, for a detailed discussion
on the incentives regime).
Despite this progress, the EPZs caught on only gradually. It took
almost 10 years for the zone to host a meaningful number of companies.
But with the growth in global production networks in the garment sector
during the 1990s, Bangladesh’s EPZs took off. A second EPZ was started
outside Dhaka in 1993 (and later expanded) and an additional six have
been opened since then, with several more in the pipeline.
Today, eight EPZs are operating under BEPZA, with two new zones in
the planning stages. In addition, a privately developed zone, operated by
the Youngone Corporation of the Republic of Korea, is under construc-
tion near Chittagong. Although the zones are spread throughout the
country, in reality, economic activity in the EPZs is highly concentrated:
of the eight operating zones, just two of them—Chittagong EPZ and
Dhaka EPZ—account for more than 80 percent of the companies operat-
ing in the EPZs (see table 2.1).
Other than Chittagong and Dhaka, all the EPZs have been launched
since 2000. The Adamjee and Karnaphuli EPZs were established on the
grounds of suspended state-owned enterprises (SOEs, the former an old
jute milling complex and the latter a steel mill), which the government
had handed over to BEPZA. The Adamjee EPZ is fully operational and
has been attracting investment at a fairly rapid rate. Karnaphuli is partly
in the project stage, but it too already has attracted some investment.
Table 2.1 Summary of EPZs, 2009

Year Size No. of active
Location Established (Hectares) enterprises
Chittagong 1983 183 140
Dhaka 1993 140 96
Mongla 2000 186 12
Ishwardi 2000 125 3
Uttara 2000 93 5
Comilla 2001 108 18
Adamjee 2005 119 12
Karnaphuli 2006 109 4
Source: BEPZA.
Note: Data represent the 2008/09 fiscal year.
Similarly, the Comilla Zone—located on the Dhaka-Chittagong

corridor—has grown steadily, if gradually. The Uttara, Ishwardi, and
Mongla EPZs have performed poorly, however. These zones, located at
great distance from the port and Dhaka, have combined to generate less
than 3,000 jobs.
Performance
After a modest start, the EPZ program made substantial advancements
within a short period of time. The EPZs employ a large number of work-
ers and account for a substantial share of exports and FDI in Bangladesh.
Given the size of the Bangladesh economy, however, the contribution of
the zones to GDP and employment is modest. Moreover, the program
remains highly concentrated in labor intensive, low skill manufacturing.
The remainder of this section reviews the results of the EPZ program
in terms of (1) firms and investment, (2) exports, (3) employment, and
(4) domestic market linkages.
Firms and Investment

The EPZ program has been quite successful in attracting investment,
particularly taking into account that Bangladesh has historically one of
the lowest levels of FDI in the region. Between 1994 and 1999, average
annual investment flows into the EPZs were US$52 million; this grew to
US$88 million in the subsequent five years (2000–04) and has since
nearly doubled to US$172 million in the period since (2005–08). As of
2009, accumulated investment in the EPZs was nearly US$1,500 million.
This is equivalent to about 15 percent of the total FDI flows into the
country since 1995.3 In 2008 and 2009, the EPZs accounted for 18 per-
cent and 22 percent (respectively) of FDI in-flows. Approximately 290
active companies are operating in the EPZs.
The majority (61 percent) of companies in the EPZs are fully foreign
owned. Of these, by far the biggest group of investors comes from the
Republic of Korea, followed by Japan; Hong Kong SAR, China; and
Taiwan, China. In addition, a number of investors from across the
European Union and the United States are prevalent across the zones.
Second most prevalent are 100 percent locally owned enterprises,
which account for 25 percent of all EPZ enterprises. Indeed, the num-
ber of Bangladeshi-owned enterprises is about on par with Korean-
owned enterprises across the EPZs. Joint ventures account for the
remaining 41 enterprises in the EPZs.
Of the active companies operating in the EPZs, nearly two-thirds are

in the garment sector (see table 2.2), with a number of other labor inten-
sive manufacturing sector making up the rest.
Exports
Promotion and development of exports is a key objective of BEPZA.
In this regard, it has been quite successful since the early 1990s (see
figure 2.1). Exports have grown rapidly, at an average annual rate of
23 percent since 1993, to reach nearly US$2.5 billion by 2008. EPZ
Table 2.2 Operating Enterprises in the EPZs by Sector,

2009
Sector No. enterprises Percent
Textile and apparel (garment) 189 65%
Electrical and electronics 15 5%
Footwear and leather 13 4%
Metal products 12 4%
Plastic products 12 4%
Food and beverages 8 3%
Other manufacturing 31 13%
Services 3 1%
Source: BEPZA.
Figure 2.1 Exports (US$ millions) and Contribution to National Exports

(percent) of EPZ Enterprises
3,000 20%
18%
2,500 16%
2,000 14%
12%
1,500 10%
8%
1,000 6%
500 4%
2%
0 0%
5
8
–9
–9
–9
–9
–9
–0
–0
–0
–0
–0
–0
–0
–0
–0
94
95
96
97
98
99
00
01
02
03
04
05
06
07
19
19
19
19
19
19
20
20
20
20
20
20
20
20
exports (left axis) contribution to national exports (right axis)

linear (exports (left axis))
Source: BEPZA.
contribution to national exports peaked at more than 18 percent in

2003 and stood still above 17 percent in 2009. It is worth noting,
however, that the EPZs still represent only 20 percent of total garment
exports from Bangladesh.
Employment
In a country with millions entering the workforce annually, the contri-
bution of the EPZs to employment generation is crucial. In terms of
this objective, the EPZ program has been modestly successful. As of
2009, about 220,000 jobs had been created in the EPZs. Although this
represents fairly substantial job creation over a short period of time
(most of it has taken place only since the early 1990s), it is important
to put this number into perspective. With a workforce of 70 million in
Bangladesh, EPZ jobs are virtually a drop in the ocean. Even relative to
the industrial workforce, the EPZ jobs contribute only about 3 percent
of total employment. In fact, even in the garment sector up to 90% of
jobs exist outside the EPZs, although evidence suggests that at least
some of these jobs exist because of the competitive export sector inside
the EPZs.
Nevertheless, EPZ jobs have had an important, positive impact on the
economy, particularly because the majority of jobs created within them
are held by women (data from BEPZA indicate that women account for
64 percent of employees in the EPZs). Nearly 60 percent of all jobs in the
EPZs are in Chittagong, which accounts for nearly 136,000 jobs; another
72,000 jobs are in Dhaka EPZ. Unlike many other EPZ programs globally,
the Bangladesh EPZs do not rely extensively on foreign labor. In fact,
99.5 percent of all employees in the EPZs are Bangladeshi—foreign
workers account for less than 1,200 jobs in the EPZs.
Figure 2.2 outlines the annual and cumulative rates of employment in
the EPZs. Over the past 10 years, nearly 15,000 new jobs have been cre-
ated annually in the EPZs. Over this time, evidence indicates that labor
productivity has been increasing steadily, if not spectacularly. Exports per
worker in the EPZs rose by an average of 2 percent annually between
1998 and 2008, reaching a level of more than US$11,000.
Domestic Market Linkages

Linkages with the domestic market are relatively limited as a result not
only of business strategies of FDI, but also of the policies and practices of
the EPZ program. Evidence, however, demonstrates that increasing sup-
ply links have been developed in recent years.
Figure 2.2 Employment Generation in EPZs (Year-Wise and Cumulative)
250,000
200,000
150,000
100,000
50,000
0
8 4
85 5
8 6
8 87
8 8
89 9
9 0
9 1
9 2
93 3
9 4
95 5
9 6
9 7
9 8
9 9
0 0
01 1
0 2
0 3
04 4
0 5
0 6
07 07
8
19 3–8
19 4–8
19 –8
19 7–8
19 8–8
19 –9
19 0–9
19 1–9
19 2–9
19 –9
19 4–9
19 –9
19 6–9
19 7–9
19 8–9
20 9–0
20 0–0
20 –0
20 2–0
20 3–0
20 –0
20 5–0
–0
19 6–
20 6–
8
19
new jobs cumulative jobs
Source: BEPZA.
In terms of forward linkages, the EPZ program has restrictive policies

in place, limiting local market sales to only 10 percent of production.
Most important, for textiles and garment companies, who make up the
bulk of EPZ enterprises, no local sales are allowed. The local market
restriction attempts to protect against unfair competition, which is
understandable given the size of the local industry and the substantial
incentives available to EPZ-based companies. Given the large domestic
market, however, FDI increasingly is looking at Bangladesh not only as a
location for an export platform, but also as an opportunity to tap into the
local market. This is particularly relevant in industries like metal products
and processed food. In general, FDI is looking to have flexibility to tap
into both local and international market demand; the domestic market
restrictions place significant limits on this. For example, a company that
wanted to set up a US$500 million steel mill recently approached the
Korean EPZ. The company, however, wanted access to the domestic mar-
ket for this investment and decided against investing because of the local
market sales restrictions. For those sectors that are allowed to sell 10
percent into the local market, administrative procedures act as an addi-
tional barrier. Firms are first required to obtain authorization from
BEPZA; they then must pay customs duties, the procedures for which
are said to be particularly burdensome.
Backward linkages, however, are not actively prohibited and, in theory,
are encouraged. However, a number of regulatory, administrative, and
general market factors place significant barriers in the way of backward

linkages. In theory, local producers selling into the EPZs can obtain duty
drawback on imported inputs (as an indirect exporter), putting them on
a level playing field with foreign suppliers to the EPZs. But for a small
producer of garments accessories or a dying and washing unit servicing
larger units inside EPZs, this turns out to be extremely difficult in prac-
tice. The Duty Exemptions and Drawback Office (DEDO) is severely
understaffed, the system of drawbacks is heavily bureaucratic, and the
process suffers from total lack of trust between the service receiver and
provider.4 Small, indirect exporters often complain that they cannot claim
drawback because they cannot attach the original bill of export with their
claims with the DEDO. As a result, small suppliers rarely claim duty
drawback.5 Second, because of security concerns and EPZ products leak-
ing into the local market, BEPZA has restricted the movement of trucks
from the domestic territory into the EPZs. This has made the process of
getting supplies from local companies more difficult—for example, trucks
are prohibited from coming in and out of the zone outside specifically
designated hours.
Despite these problems, the large local supply base is making some
inroads into the EPZ exporters. BEPZA points to the case of a Swedish
contractor to H&M, which sources inputs from 27 different local sup-
pliers. This certainly may be the exception to the rule, but it does
underscore the size of the local supply base and the diversity available,
something that is not the case in many EPZ programs in Africa, for
example.
Key Success Factors

A number of exogenous factors explain the rise of Bangladesh as an
export location for the garment sector, but several aspects of the EPZ
regime have played an important role—in particular, the availability of
serviced land and supporting infrastructure, the transparent and relatively
efficient administrative regime in the zones, and the incentives regime
that is available to zone-based firms. This section discusses each of these
factors after an initial introduction to two critical exogenous factors that
also are affected by the EPZ program: wages and market access.
Exogenous Factors: Wages and Market Size

Whatever role the EPZs have played in supporting the rapid growth of
garment sector exports in Bangladesh, the most critical factor behind
Figure 2.3 Comparison of Average Wages and Benefits of Unskilled Workers

in SEZs
350
300
49
250
US$/month
200 41 62
150
264 38 3
37
100 25 184 163
50 14 112 115
77 96
32
0
h
DR
as
na
l
ga
ni
th
s
na
ur
de
a
za
ne
so
Gh
nd
et
la
Se
Le
Vi
ng
Ta
Ho
Ba
base benefits
Source: Farole (2011).

Note: The data presented in this figure on wages in Bangladesh were obtained before the July 2010 decision to
raise the national minimum wage substantially.
growth of the sector in Bangladesh is the country’s labor cost advantage.

Low-skill garment workers in Bangladesh receive among the lowest
wages paid in formal employment anywhere in the world, with starting
wages only around US$30 per month.6 Figure 2.3 shows a comparison of
average wages in free zones around the world, based on a recent World
Bank survey (Farole 2011). The labor cost advantage for Bangladesh is
striking—wages are 2.5 times lower than the next cheapest country
(Vietnam), and more than three times lower than in most African SEZs.
Even accounting for relatively low productivity, for labor-intensive activ-
ities like garment processing (where wages often account for 50 percent
or more of total production costs) the case for locating in Bangladesh is
compelling.
In addition to the significant labor cost advantage, Bangladesh also
benefits from its huge market size. Despite limited purchasing power,
producers in Bangladesh are interested in accessing the 150 million
people living in the country. In addition, the scale of the market—
particularly around Dhaka and Chittagong—ensures access to critical
material and service inputs to producers, which may be unavailable in
smaller markets.
Offsetting these advantages, however, Bangladesh, like most low-
income countries, struggles with a poor investment climate. The private
sector remains weak, and regulations and weak institutions make setting
up a business extremely difficult, for both foreign and domestic investors.
Bangladesh ranks 119 of 183 countries in the World Bank’s Doing Business
index for 2010 (World Bank 2009). In some key components of the
index, in which Bangladesh has fared worst, it is clear that the EPZ envi-
ronment helps investors to overcome significant constraints. In particular,
these constraints relate to accessing and developing serviced land
(Bangladesh ranked 176 of 183 countries on the measure “registering a
property”), obtaining licenses, and other regulatory constraints. Other
important investment climate constraints identified—for example, in the
World Bank’s Enterprise Surveys (World Bank 2008)—include corrup-
tion and unreliable power. The environment for both of these constraints
is at least partly improved inside the EPZs. Finally, companies operating
inside the EPZs report that internal security protects them from such
issues as labor unrest, vandalism, and petty extortion, which are problem-
atic outside the zones.
Provision of Serviced Land and Supporting Infrastructure

Because Bangladeshi land titling issues present a major constraint to
investment and the country’s industrial land market is severely con-
strained, BEPZA’s provision of land and factory shells plays a critical role
in attracting investment. BEPZA offers land on 30-year leases, which may
be renewed, and enterprises construct their facilities in designated plots
of typically 2,000 square meters. BEPZA also rents prebuilt factory units
on shorter lease periods, which attracts investors that are not in a position
to invest substantially upfront and are looking to set up operations
quickly and with little risk. Given the high costs of land access and devel-
opment in Bangladesh, it is widely believed that the rates charged are
highly subsidized.
As of end 2009, no space is left in the two main zones of Dhaka and
Chittagong. Although company turnover allows some new investors to
move in every year, most investors are now limited in their options—they
must either move to another EPZ in a less desirable location or set up
outside the EPZs. BEPZA has been looking to expand in Dhaka for several
years, but the high cost of land acquisition is making this problematic.
Another key area of infrastructure provision by BEPZA is electricity
and gas. Outside of the zones, power is a major problem in Bangladesh,
and most companies must rely on their own generators. Inside the zones,
BEPZA purchases power from the national grid and sells it to enterprises
in the zones, adding a 10 percent surcharge (this is an important revenue
source for BEPZA). Although the country faces an acute power shortage,
BEPZA’s power supply takes priority over other national usage. BEPZA
also has allowed companies to produce power within the zone for the
zone’s use only, and several of these power plants (some under public-
private partnerships (PPPs)) are expected to be in operation soon.
In addition to this core infrastructure, BEPZA also develops and main-
tains a wide range of key supporting infrastructure in the zone, including
business and commercial infrastructure, administrative infrastructure, and
infrastructure to support leisure, family, and quality-of-life issues. These
include the following:
• Business: Bank, business center, courier, post office, clearing, forwarding,

and shipping agents
• Administrative: Customs office, police station, in-house security, fire
station, public transport, medical clinic
• Support and quality of life: Restaurant and canteen, health club, investors
club, recreation center, school, sport complex
Efficiency of the Administrative Regime

In the bureaucratic environment of Bangladesh, BEPZA offers the best
service in terms of ease of obtaining licenses and approvals. BEPZA’s rec-
ommendation to other agencies is taken seriously and BEPZA’s officials
make an effort to guide the processes through the various channels. The
administrative functions within BEPZA’s own domain work quite well,
and investors seem to be quite satisfied with the speed and efficiency of
the system within BEPZA. The BEPZA executive board has the capacity
to make its own decisions and execute them. Moreover, certain activities
have authority delegated to BEPZA, including registering a business, for-
eign investments and loans approval, and outsourcing services such as
power generation. The fact that BEPZA reports directly to the prime
minister’s office is seen as a critical factor that supports its efficient deliv-
ery of services to investors.
Incentives Regime
The core fiscal incentive offered in the zones is a 10-year tax holiday,
followed by an additional five years with a 50 percent reduction
(the normal corporate tax rate for industrial companies ranges from
27.5 percent for publicly traded companies to 37.5 percent for
nonpublicly traded companies7). This incentive is broadly in line with
international norms; however, it actually is less generous than in many

EPZs, which either offer unlimited tax holidays or allow the tax holiday
to begin only after a ramp-up period or when the company first reaches
profitability (in Bangladesh, the tax holiday begins the first year of
operation). In addition to corporate tax, expatriate workers receive a
three-year exemption from paying income tax. Other fiscal and nonfis-
cal incentives, offered in most EPZs around the world, are available in
Bangladesh (see box 2.1).
Another important part of the package to attract foreign investors is a
regulatory framework that provides confidence of across-the-board inves-
tor protection. This includes the Foreign Investor Protection Act of 1980,
Box 2.1
Incentives Offered in Bangladesh EPZs

Fiscal incentives
• 10-year tax holiday; additional 5 years at 50 percent

• Duty-free import and export of raw materials and finished goods
• Duty-free import of construction materials, equipment, office machinery, spare
parts
• Relief from double taxation
• Exemption from dividend tax
• Duty-free import of two to three vehicles for use in EPZ
• Expatriates exempted from income tax for three years
• Accelerated depreciation allowance on machinery or plant
• Remittance of royalty, technical, and consultancy fees allowed
Nonfiscal incentives
• 100% foreign ownership permissible

• No ceiling on foreign or local investment
• Full repatriation of capital and dividend
• Foreign currency loans available directly from abroad
• Permission to hold nonresident foreign currency deposit account
• EPZs enjoy most-favored nation (MFN) status
• Operation of foreign currency account allowed for all companies not 100%
locally owned
Source: BEPZA.
the availability of insurance through the Overseas Private Investment

Corporation (OPIC, a U.S. government agency) and the Multilateral
Investment Guarantee Agency (MIGA, part of the World Bank Group),
access to arbitration through the International Settlement of Investment
Disputes, and safeguarding of copyrights through the World Intellectual
Property Organization.
Challenges for the Future

Despite the rapid growth of exports in recent years, Bangladesh’s manu-
facturing export sector will face a number of significant challenges in
the years to come. The EPZ program has the potential to play an impor-
tant role in confronting these challenges; but to do so, the program will
need to undertake some significant reforms of its own. This section dis-
cusses some of these key challenges and the implications for Bangladesh’s
zones program.
Balancing Competitiveness with Sustainable Wages

and Working Conditions
Bangladesh’s competitive positioning in the global garment sector is built
around its significant labor cost advantage relative to alternative produc-
tion locations. But even with millions of new workers entering the labor
force each year, the huge wage differential is unlikely to remain sustain-
able. Indeed, the recent decision to nearly double the minimum wage (to
3,000 taka per month, up approximately US$43 from 1,662.50 taka) in
the garment sector is evidence of the upward pressure on wages. In addi-
tion, although the EPZs have created substantial employment opportuni-
ties for low-skilled workers and have had a particularly important impact
on poor families through the creation of wage-earning opportunities for
females, they also have been criticized for quality of work, working condi-
tions, and worker rights. Maintaining a competitive labor cost (or produc-
tivity) position while also delivering quality, sustainable employment
opportunities will be a significant challenge for the zones program.
Most evidence indicates that wages and working conditions inside the
zones are better than outside the zones. For example, wages in the zones
are on average 20–30 percent higher than what is offered for the same
job outside the EPZs, and factories outside the EPZs are infamous for
delaying wage payments. Moreover, benefits (transport, meals, access to
health clinics, holidays) and mandatory annual wage increases make
employment inside the zones superior to what is available outside.
Despite these benefits, worker rights in the zones were poorly protected
for a long time. EPZs have been exempted from national labor regula-
tions. The EPZ Act, in an apparent effort to provide a more favorable
investment environment, suspended the application of the 1969 Industrial
Relations Ordinance and subsequent amendments, which provide for the
right to organize labor unions and enter into collective bargaining agree-
ments, as well as other labor-related legislation. Consequently, labor
unions have been prohibited in the zones.
In 2004, against international pressure, Parliament passed the EPZ
Workers Association and Industrial Relations Act 2004 (amended October
2010). This granted the workers some leeway to establish a franchise of
workers. Although limited to only certain types of collective activity, the
act allows the workers to organize elections to represent their demands
and participate in collective actions in harmony with BEPZA’s other
regulations. This is a step toward rights to free collective union. Under this
legislation, however, a ban on strikes and lockouts remained. The legisla-
tion was originally set to expire at the end of 2008, but BEPZA was able
to extend it through October 2010.
In the absence of national regulations, BEPZA follows a suggested
set of instructions regarding labor relations, which are referred to as
“Instruction 1” and “Instruction 2.” These instructions have been the rules
and regulations bible in terms of the worker-owner-BEPZA relationship
and compliance, and therefore they provide an established reference
point. The problem is that, although the de facto situation in most firms
in the EPZs is relatively good, the de jure situation as per Instructions
1 and 2 not only offers weak protection of workers’ rights but also speci-
fies lower benefits to what is available under the national labor regulations.
In addition, capacity to monitor and enforce regulations is limited.
As a result of this inconsistency, and in light of the recent labor unrest
and the massive protests against some of the factory owners, BEPZA has
made efforts to improve worker-owner relations in the zones. One com-
ponent of this effort was the establishment of a Labor Counselor Program
(see box 2.2). After an initial pilot, 67 counselors were recruited to act as
go-betweens and resolve problems between workers and managers. These
counselors worked closely with the workers and the management and
reported progress to BEPZA. They were extension workers of BEPZA
and became solid advocates for the workers’ concerns and rights. This
project, originally funded by the World Bank, has been slightly modified
and sustained through funding by the Bangladesh Investment Climate
Fund (BICF).
Box 2.2
The Labor Counselor Program

The Bangladesh Export Processing Zones Authority (BEPZA) is endowed with
the responsibility of ensuring compliance on social and labor issues within its
zones. Acknowledging that BEPZA’s resources, especially in the areas of social
and labor aspects, are thinly stretched, BEPZA initiated an innovative program
in 2005. The program, funded by the World Bank, recruited approximately 67
counselors to work closely with the workers and their respective management
with the intention of proactively addressing issues related to wages, working
conditions, food, childcare, benefits, and security. These counselors worked on
behalf of BEPZA but were perceived more like facilitators than regulators and
enforcers. These young recruits paid almost daily visits to their designated fac-
tories to work with management on the correct application of labor issues and
compensation practices. They also acted as informal arbitrators between man-
agement and workers to resolve grievances. They also reported to BEPZA any
existing or potential issues. The International Finance Corporation (IFC) esti-
mated that the better implementation of existing rules thanks to the role of
these counselors resulted in an increase of 32 percent in wages for the workers
in the EPZs.
The program was valued both by BEPZA’s management and the workers. The
initial funding for the program expired in 2009. At BEPZA’s request, the IFC BICF
put in additional funding to continue the counselor program. Realizing the ben-
efit of the program, BEPZA is committed to integrating the program into its main-
stream operational budget. Following allegations of unpaid wages, the country
experienced massive demonstrations and unrest. In 2006, two factories were set
fire in the Dhaka EPZ. This case of unrest was one of the worst in recent times. The
role of the counselors in avoiding such situations in the future has been estab-
lished and acknowledged by all stakeholders.
Despite significant unrest that shook Bangladesh’s garment sector in 2010,
no incidents were reported in any of the EPZs in the country. The work of the
labor counselors since the BICF started employing them in 2007 has been
instrumental in the stark contrast in unrest inside and outside the zones. The
counselors have acted as an effective and informal arbitration mechanism and
have built a relationship of trust between worker and employer in all the EPZs.
As evidence of this, in the Dhaka EPZ, grievances have declined from 2,000 in
2007 to 400 in 2009.
Source: Authors.
Diversification
When the Board of Investment established the first EPZ in Chittagong,
the mandate was to accept only high-technology companies and not to
attract labor-intensive garment companies. This, in part, explains the long
delay in filling up the EPZ. Apparently, it was only after one garment
company called itself “Hi Tech Knitwear” that they were allowed into the
zone. This paved the way for other garment companies and the EPZs
subsequently took off.
Since that time, there has been much talk about diversifying the indus-
trial base of the EPZs, but little to no concerted action has been taken to
effect such change. Across all the EPZs in Bangladesh, garment produc-
tion accounts for two-thirds of companies and close to 90 percent of jobs.
Despite the BEPZA’s repeated statements of intent to deny any more
garment investments into the EPZs to promote diversification, as late as
December 2009, new garment projects had been accepted. In recent
years, the EPZs have shown little to no diversification and no apparent
targeted investment promotion strategy that will effect such a change.
Within the garment sector as well, upgrading over the years has been
limited. Although the EPZs have suppliers across the range of inputs,
assembly, and finishing, few companies have become full-package sup-
pliers, with the vast majority carrying out simple cut, make, and trim
activities.
Reform of Existing EPZ Regime

To address these and other challenges facing the export sector, in the com-
ing years, reforms to the existing EPZ regime are needed in several areas.
First, BEPZA needs to realign its program of fiscal incentives. Like
most traditional EPZ programs, BEPZA’s incentive scheme is tied to
exports, which makes it incompatible with the WTO Agreement on
Subsidies and Countervailing Measures. As a least-developed country
(LDC), Bangladesh remains exempt from these prohibitions for the time
being. However, as the leases in the EPZs are set for 30 years, it may be
difficult to phase out the incentive schemes in the future (when
Bangladesh does graduate from the low-income country exemption) if
the adjustments are not made ahead of time. This adjustment likely will
involve a phasing out of the core fiscal benefits over time.
Second, there is a need to promote much greater private sector devel-
opment and management in the zones program. BEPZA’s role as regula-
tor and operator has been identified as a major obstacle to the continued
success of the zones, both in terms of regulatory compliance and private
sector–led growth. Until very recently, BEPZA has had an implicit

monopoly on developing and managing EPZs. Although the Private EPZ
Act of 1996 makes a provision for private entities to develop and run
EPZs, it lacks any clear criteria for approving such zones and the nominal
regulator of private zones (an Executive Cell, which is essentially a paral-
lel regulator to BEPZA) has no capacity or resources to perform its
responsibilities. Thus, 13 years after the passage of the legislation, only
one private sector–led EPZ has been initiated, and it has not yet managed
to become operational (see box 2.3).
The Economic Zones Act, which was passed in July 2010, will result
in substantial changes to the existing zones regime in Bangladesh and
Box 2.3
The Korean EPZ: The First Private EPZ in Bangladesh

The Youngone Corporation was the first company to obtain a license from the
Government of Bangladesh to build and operate an EPZ. Youngone is a Republic
of Korea conglomerate that has been operating in the Bangladesh EPZs since the
early 1980s. It is one of the largest and most reputable companies in BEPZA’s
zones, with at least eight companies operating in textiles, garments, footwear,
sportswear, and plastics. The “Korean EPZ” will, when it becomes operational, be
the largest EPZ in Bangladesh.
Youngone purchased 2,500 acres of land in Chittagong to build an EPZ in the
mid-1990s. The land has since been prepared and the site has been zoned.
Equipped with housing, hospitality, independent jetty, and an 18-hole golf course,
the Korean EPZ is designed to host an array of activities and service within its
boundaries, including both light and heavy industry. The master plan for the proj-
ect estimates that it will attract US$1 billion in investment, resulting in at least
100,000 jobs and US$1.25 billion worth of exports.
However, the process of establishing the EPZ has proceeded far from smooth-
ly. Licensing of the EPZ took almost eight years and an operational license was
only obtained in May 2007. This delay is attributed to problems in gaining envi-
ronmental clearance, bureaucratic procedures in setting up the zone, and the lack
of institutional capacity to support private sector zone development. In addition,
the project suffered long delays because of the inability to access electricity and
gas supplies. Indeed, access to gas still was not resolved as of late 2009 and con-
tinues to delay development.
Source: Authors.
Box 2.4
The Economic Zones Act

The Economic Zones Act, which was passed by Parliament in July 2010, has the
following strategic provisions:
• Establish one law to govern all economic zone programs in the country
• Create a broader and more flexible model for zones allowing exports as well as
local sales
• Bring larger areas under special regimes, which may include existing EPZs and
industrial estates
• Set clear and objective criteria for site selection and mandatory feasibility stud-
ies to eliminate discretionary powers and erratic decision making
• Facilitate an increased role of the private sector in ownership, management,
and operation of zones
• Allow a light-handed approach to the regulation of zones
• Ensure that all zones are operated on commercial principles and the market to
drive the price of services
• Allow the conversion of any zone into an SEZ with parameters fulfilled
• Make a provision for declaring large geographic areas to be brought under
special administrative and incentive regimes to allow “brownfield” approach
Source: Authors.
will address many of the reforms (see box 2.4). The act moves
Bangladesh beyond the traditional EPZ regime to embrace a broader
SEZ or “economic zone” model. Specifically, it allows for much larger
scale zones and takes a more flexible approach to the types of activities
that can be undertaken within the zones. In addition, not only does the
new act put greater emphasis on private sector participation in zone
development, but it also substantially alters the role of BEPZA by split-
ting its regulator function from its development and management role.
Finally, it ensures more private provision of public goods in the zones as
well as PPPs.
Conclusion
In 2008, BEPZA celebrated its 25th anniversary. What started as a pilot
program has now become a large and substantial element of the
government’s investment attraction and industrialization efforts.

Bangladesh’s EPZs have been highly successful in attracting investment
and creating jobs, particularly for low-skilled female workers. It also has
played a part in creating a more efficient investment environment in the
country and, indeed, in putting Bangladesh on the map as a low-cost
location for FDI in the garment sector. Given the size of the national
economy, the overall impact of the EPZs on employment and exports
has been relatively modest; however, they are likely to have played at
least some catalytic role in supporting the growth of the garment sector
outside the walls of the EPZs.
On the other hand, the EPZs have been less successful in facilitating
upgrades and diversification in the economy. Indeed, they arguably have
further entrenched the reliance on garment assembly. In addition, the
EPZs have been widely criticized for their treatment of workers and for
environmental failings. Although, in fact, the situation in both these
respects is generally much better inside than outside the EPZs, it is true
that the EPZs have not yet met their potential as modernizing influences
in the industrial system in Bangladesh. That said, several recent initia-
tives discussed in this paper—most critically the adoption of a modern
Economic Zones Act—suggest that the EPZs still have a potential to play
a role in facilitating a transition toward a higher quality, more sustainable
manufacturing sector for Bangladesh.
Notes
1. Although in recent years, demand for natural fibers has grown, leading to
a substantial rise on the global market and prices for raw jute (de Vries
2007).
2. As of March 2009, BSCIC operated 74 industrial estates.
3. Assumes that approximately 80 percent of EPZ investments accrue from
FDI.
4. In a survey conducted in 2006, DEDO had more than 2,000 pending applica-
tions, 30 percent of which were from 2004; in most cases, drawback takes
3–18 months and significant amounts of paperwork to be processed.
5. An estimated less than 10 percent of eligible duty drawback is claimed
through the system.
6. The data presented here on wages in Bangladesh were obtained before the
July 2010 decision to raise the national minimum wage substantially.
7. The vast majority of EPZ companies are not publicly traded.
References
Bangladesh Bank. 2009. Available at http://www.bangladesh-bank.org (accessed
December 14, 2009).
BEPZA (Bangladesh Export Processing Zones Authority). 2009a. Available at http://
www.epzbangladesh.org.bd/.BEPZA 2009b. “Investment Opportunities in
the EPZs of Bangladesh.” Presentation to the World Bank Group, Dhaka,
March 2009.
BEPZA (2010) Available at http://www.epzbangladesh.org.bd/bepza.php?
id=YREMPL.
de Vries, Johan. 2007. “Export of Jute Products from Bangladesh to Europe:
Analysis of Market Potential and Development of Interventions for GTZ-
PROGRESS.” Available http://essay.utwente.nl/639/ (accessed December 16,
2009).
Farole, T. 2011. Special Economic Zones in Africa: Comparing Performance and
Learning from Global Experiences. Washington, DC: World Bank.
World Bank. 2008. Harnessing Competitiveness for Stronger Inclusive Growth:
Bangladesh Second Investment Climate Assessment. Washington, DC: World
Bank.
World Bank. 2009. Doing Business 2010: Country Profile for Bangladesh, Comparing
Regulation in 183 Economies. Washington, DC: World Bank.
CHAPTER 3
Success and Stasis in Honduras’

Free Zones
Michael Engman
Introduction
How did a small, unremarkable Central American country with a turbu-
lent political past (and, indeed, present) manage to become a leading
exporter of clothing and apparel to the United States and, in doing so,
create in excess of 100,000 new jobs? Although not without peers in the
region, Honduras has achieved notable success with its free zones. The
Honduran free zone/maquila program was established as early as 1976;
however, it was not until the 1990s that it reaped dividends for the
economy, as a confluence of factors, including external political events
and economic trends, government policies, and a dynamic private sector,
enabled the country to attract large-scale FDI and become a location of
choice for offshoring in the U.S. apparel sector.
Over the last two decades, the free zone industry has expanded rapidly
in terms of investment, exports, and employment. However, the global
economic downturn began to affect the sector in the second half of 2008.
By mid-2009, the poor economy resulted in sizeable layoffs and some
companies closing down their operations in Honduras. The global eco-
nomic crisis has exposed possible weaknesses in the competitive position
of the traditional labor-intensive processing activities on which Honduras’
free zones have relied and highlighted the urgency of diversification.
47
In facing this challenge, Honduras can draw on many of the strengths that
allowed it to build a successful free zone export sector. Some of these
same factors also may be a source of “lock-in” that prevents the govern-
ment and the free zone sector from making the decisions necessary to
achieve diversification and upgrading in the sector.
This chapter analyzes Honduras’ experience with free zones over the
past three decades. It discusses the factors that contributed to its success
and the key challenges the industry faces today.
Historical Development of Free Zones in Honduras

The maquila1 (or maquiladora), which in Latin America and the
Caribbean refers to factories that use duty-free imports of materials and
equipment to assemble products that are exported predominantly to the
U.S. market, was introduced in Honduras in the mid-1960s. The interest
in this factory concept stemmed from a wave of initiatives in Central
America, the Caribbean, and East Asia to integrate industrial parks into
national development plans. By establishing geographically limited
enclaves with dedicated infrastructure, streamlined public administration,
and various fiscal incentives, the underlying idea was that developing
countries would be able to attract foreign capital and technology used for
labor-intensive, export-oriented production activity. This capital would
generate employment and foreign exchange that by extension would
stimulate economic growth and facilitate the payment of imports.
Political disturbances including the 1969 war with El Salvador, which
destroyed infrastructure, alarmed investors, and shifted policy attention,
were partly responsible for Honduras failing to follow Mexico and the
Dominican Republic as early adopters of the maquila policy. In 1976,
however, the country enacted its first free zone law,2 which allowed
export-oriented companies established in Puerto Cortés to enjoy a num-
ber of mostly fiscal incentives.
The early years following the passing of the Free Zone Law saw limited
investment and business activity—eight companies chose to invest in the
Puerto Cortés free zone in its initial years of operations. To broaden the
choice of location for investors, the Free Zone Law was in 1979 extended
to another five counties: Amapala, Choloma, La Ceiba, Omoa, and Tela.
In 1984, the Temporary Importation Regulations Law extended many of
the fiscal incentives to export-oriented companies based outside the free
zones to create a domestic supply base and soften the economic distortions
that the zones gave rise to. The Export Processing Zone (EPZ) Law of 1987
Success and Stasis in Honduras’ Free Zones 49
later provided similar fiscal incentives to both export-oriented companies

and real estate owners who invested in the physical infrastructure of
industrial parks anywhere in the country. Finally, on May 20, 1998, after
22 years of selective enlargements, this process was complete as the
National Congress declared the entire national territory a Free Zone Area
(Decree No. 131-98), allowing privately owned and managed EPZs (or
“ZIPs,” Zonas Industriales de Procesamiento) to be established anywhere in
the country.
Honduras offers several advantages as a base for manufacturing of light
goods, including (1) the proximity to the U.S. South and East Coast mar-
kets; (2) the efficient deepwater port of Puerto Cortés; (3) the sizeable
cluster of textiles and clothing companies in the San Pedro Sula region;
(4) preferential market access through the Caribbean Basin Trade
Partnership Act (CBTPA) and the Dominican Republic-Central American
Free Trade Agreement (DR-CAFTA); and (5) a comprehensive free zone
regime with favorable fiscal incentives (see box 3.1). In addition, although
higher than in neighboring Nicaragua and in some other large exporting
countries like Bangladesh, China, and Vietnam, labor costs are relatively
low in Honduras compared with other countries in its region.
Performance
Honduras has experienced rapid growth in the free zone program, par-
ticularly in the period from the early 1990s through 2007. This section
provides a brief summary of progress of the zones program across the
main components of performance: firms and investment, exports,
employment, and local market linkages.
Firms and Investment

The free zone sector in Honduras consists of a fairly large cluster of light
goods manufacturers concentrated around the city of San Pedro Sula near
Puerto Cortés. As of the end of 2008, 342 free zone companies, pre-
dominantly in the textiles and clothing sector, were based either in one of
two dozen privately operated zones or operating as “single zone enter-
prises.” Most of the companies operating in the zones are foreign owned,
while the owners and operators of the free zone industrial parks are pre-
dominantly Honduran investors. The dominant position of the textiles
and clothing sector is confirmed by the data available on FDI (see
tables 3.1 and 3.2). The sector received on average 64 percent of total
FDI in the manufacturing sector in 2004–2007. “Electronic components,”
Box 3.1
Incentives in the Honduras Free Zones

The fiscal incentive structure that the Government of Honduras offers companies
with free zone status is generous from an international perspective. Free
zone–based companies are exempt from all federal and municipal taxes as well as
duties and charges associated with trade. What makes the fiscal incentive struc-
ture in Honduras rather unique is the fact that there is no time limit attached to
the fiscal incentives. The boxed table summarizes the incentive structure offered
in the various laws that cover companies in Honduran free zones.3 The legal
framework that currently governs the free zones is tailor-made for the manufac-
turing industry and does not cover the provision of services. However, in practice,
the government does not enforce this rule and it is said to allow those zones that
move into the business of call center services.
Free Trade Zone Export Processing Temporary Import

Incentives (ZOLI) Zone (ZIP) Law
Imported duties on 100% exemption 100% exemption 100% exemption
raw materials,
components
Export taxes 100% exemption 100% exemption 100% exemption
Local sales and 100% exemption 100% exemption 100% exemption if
excise taxes imported
Taxes on net assets 100% exemption 100% exemption Subject to payment
Taxes on profits 100% exemption 100% exemption Subject to payment
Municipal taxes 100% exemption 100% exemption Subject to payment
and obligations/
duties
Taxes on profits 100% exemption 100% exemption Subject to Central
repatriation Bank
Capital repatriation 100% exemption 100% exemption Subject to Central
Bank
Currency Unrestricted Unrestricted Subject to Central
conversion Bank
Customs Cleared on site Cleared on site Through a customs
agent
Sales to 5% of total Only paying Only paying customs
local market production customs duties duties authorized
paying customs authorized by the by the Secretariat
duties Secretariat of of Industry and
Industry and Trade Trade
(continued next page)
Box 3.1 (continued)
Free Trade Zone Export Processing Temporary Import

Incentives (ZOLI) Zone (ZIP) Law
Eligibility Industrial and Industrial and Industrial and
requirements commercial supporting commercial
companies can companies can be companies can be
be established established established
Source: Asociación Hondureña de Maquiladores (2009).
Table 3.1 FDI in Manufacturing Activities

(US$, million)
2004 2005 2006 2007 Average 2004–2007
Textiles 92.2 76.3 127.3 197.6 63.7%
Input services 20.7 22.9 32.0 20.0 12.3%
Commerce –3.3 8.0 16.3 5.8 3.5%
Agriculture and fishery 7.7 7.8 8.2 4.3 3.6%
Cardboard products 3.8 3.3 –9.1 1.9 0.0%
Plastic products 0.0 0.6 0.4 0.1 0.1%
Chemical products 0.0 2.7 0.0 0.0 0.3%
Furniture & wood products 0.5 –0.4 0.5 –1.5 –0.1%
Tobacco 22.4 5.3 –0.1 –3.6 3.1%
Electronic components 28.7 65.3 2.3 –5.3 11.7%
Other industry 2.2 3.9 6.9 0.2 1.7%
Total 174.9 195.8 184.7 219.6
Source: Central Bank of Honduras (2008).
Table 3.2 FDI in Manufacturing by Country of Origin

(US$, million)
2004 2005 2006 2007 Average 2004–2007
Canada 37.9 4.5 65.6 112.6 28.5%
El Salvador 1.4 0.9 0.2 1.0 0.5%
Germany 2.2 0.8 0.4 –2.8 0.1%
Korea 16.8 17.5 10.9 10.9 7.2%
Mexico 0.2 0.6 7.0 –3.4 0.6%
Spain 4.3 1.3 3.9 0.1 1.2%
Switzerland 0.0 7.0 6.6 7.2 2.7%
Taiwan 4.2 6.4 10.6 5.7 3.5%
UK –0.1 1.0 4.1 5.0 1.3%
United States 75.8 140.0 75.9 81.7 48.2%
Other countries 32.2 15.8 –0.5 1.6 6.3%
Total 174.9 195.8 184.7 219.6
which includes wire harnesses, generated significant amounts of FDI in

2004–05, but this sector has been largely defensive in the 2006–2009
period, and some companies have closed down their operations in
Honduras. Canada and the United States were by far the largest sources
of FDI inflows in 2004–2007. Overall, the free zone industry captured
34.4 percent of total FDI in 2007 (EIU 2008).
Production and Exports

Table 3.3 shows that in 2007, the value added contribution of the free
zone/maquila industry to the overall economy (GDP) and to the coun-
try’s overall industry production was 7.7 percent and 42.7 percent,
respectively. The share of the maquila industry to GDP has been stable
in the years following the expiration of the MFA (at least until the
beginning of the global economic crisis starting in 2008), which sug-
gests that one or more of the following is happening: the industry is
maintaining competitiveness in its traditional apparel-processing activ-
ities despite the growing competition from Asian producers; it is shift-
ing to higher value added segments of the sector; or it is diversifying
away from clothing.
Free zone exports have grown rapidly since the early 1990s. Value
added export earnings reached US$3.3 billion in 2007 (EIU 2008), a
level 10 times higher than in 1993 (equivalent to 20 percent average
growth each year over that period). Recent data by the Central Bank of
Honduras also indicate that this expansion continued in 2007 but that
the global economic downturn, which started in Honduras’ main export
market, the United States, had a negative impact toward the end of 2008
and a strong negative impact in 2009. According to the Maquila
Association of Honduras, the country is now the fourth-largest supplier
of clothing (garment) products (5.9 percent market share) and the sec-
ond-largest supplier of electric harnesses to the United States. It is also
Table 3.3 Value-Added Contribution by Manufacturing in “Industry” and

“Maquila Industry”
Gross value Gross value Maquila
GDP added industry added Maquila industry Maquila/GDP
Year (Lempira mn) (Lempira mn) (Lempira mn) (percent) (percent)
2005 183,749 35,066 13,898 39.6 7.6
2006* 204,685 38,129 15,558 40.8 7.6
2007* 232,817 42,209 18,029 42.7 7.7
* = preliminary.
the world’s largest importer of U.S. yarn (US$799 million in 2008).

Honduras’ producers excel in particular at producing small orders for
expedient delivery to the U.S. market. This is a key comparative advantage
given rapid shifts in fashion and taste as well as retailers’ effort to reduce
the costs of inventory. U.S. orders of textiles and clothing in the mass
market are increasingly being sourced from more cost-effective locations
like Bangladesh, China, and Vietnam.
Employment
The main objective of the government’s free zone policy is employment
creation—in this regard, the program has been quite successful. In 2007,
employment in the free zone industry reached 134,000 workers; up by
3 percent year on year in 2005 and 2006. Seventy-seven percent of the
workers were employed in the textiles and clothing sector. The only other
product category with more than 3,500 employees was “car parts and
wire harnesses” for vehicles, which accounted for about 10 percent of free
zone employment (13,600).
Figure 3.1 illustrates the development of employment in the free
zones since 1995. The figure indicates that rapid growth of employment
took place mainly in the 1990s. Following recent declines, however, the
estimated employment in 2008 was only 15 percent higher (114,000)
than employment 10 years earlier (99,000). This is partly a result of
capital deepening and increases in productivity—important factors to
stay competitive and to move up the value chain—since exports have
increased more rapidly over the same period (see WTO 2003). But it also
reflects declining competitiveness in the labor-intensive assembly activities
Figure 3.1 Employment in Free Zones
140,000
# workers employed in SEZs
120,000
100,000
80,000
60,000
40,000
20,000
0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
20
20
20
20
20
20
20
20
20
Sources: WTO (2003) for 1995–2001; Asociación Hondureña de Maquiladores (2009) for 2002–08.
that traditionally have been at the heart of the maquila program. Thus,
although the free zone policy generally has been a success, free zones may
have limited scope to absorb more than a small share of the growing labor
market in the future.
In 2007, 169 textiles and clothing companies were based in the free
zones, but a small handful of MNCs accounted for the majority of the
103,377 workers in the sector. Canadian company Gildan, which assem-
bles a wide range of products, including socks, fleece products, and knit
products such as T-shirts and underwear across several factories, is the
largest employer in the Honduran free zones. Gildan, along with U.S.
multinationals, such as Fruit of the Loom and Hanes, each employs more
than 10,000 workers.
Local Market Linkages

Forward linkages are limited, in part, because the dominant apparel pro-
duction sector is geared almost exclusively for the U.S. market. But policy
barriers also restrict forward linkages by free zone companies. To protect
local producers based outside the free zones (those that do not enjoy tax
free status or other incentives available to free zone firms), Honduras
restricts free zone firms to selling a maximum of 5 percent of their output
into the local market.
Honduras has been fairly successful at developing backward linkages
(i.e., establishing a domestic support industry that provides locally pro-
duced goods and services for the free zone–based manufacturers). The
original maquila concept was essentially a “job shop” in which imported
inputs were assembled and stitched together by local labor and then
exported to foreign markets. This situation held for Honduras during the
early years; however, local suppliers based in Honduras now are providing
a number of locally produced intermediary goods in the production
chain, in particular, textiles used in the apparel sector. As of 2011,
Honduras had 10 to 12 mills producing textiles for the clothing and
apparel sectors.
Key Success Factors

As noted, although the free zone program in Honduras began in the mid-
1970s, it was by no means an immediate success. In fact, it took at least
15 years before the investment in the sector really began to take off. A
number of factors contributed to this eventual success, including a will-
ingness to evolve the legal framework for the program; effective use of
preferential trade agreements; government support to develop the neces-

sary infrastructure and support services for the zones; support for agglom-
eration; effective institutional support, particularly in marketing and
promotion; and, most important, a dynamic, entrepreneurial domestic
private sector. But what appears most critical to this success is that all of
these factors came together at the same time. Moreover, they did so at a
fortunate time when external political and economic factors also favored
investment in Honduras—specifically, the U.S. recession of the early
1990s, which helped to trigger offshoring of labor-intensive production in
the apparel sector, and Honduras’ position as a relatively stable environ-
ment in the midst of civil strife throughout the region. This section
reviews each of the main components that contributed to the success of
the free zone program.
Experimentation and Evolution to Reach a Sound Legal Framework

that Facilitated Private Investment
It took Honduran legislators almost a quarter of a century to find a legal
framework for free zones that conformed to the demand of all stakehold-
ers. The enactment of the first piece of legislation in 1976 created a small
publicly run enclave near Puerto Cortés, which targeted export-oriented
foreign investment. Over time, the government enacted several pieces of
new legislation that broadened the geographic reach of the free zone
policy. Most critical in this regard was the 1987 Export Processing Law,
which (1) abandoned the previous policy discriminating against domestic
private investors, and (2) opened up the fiscal incentives of the free zone
program to export-oriented companies and real estate developers who
invested in the physical infrastructure of industrial parks anywhere in the
country. As discussed in the following section, this law helped to unlock
investment from local entrepreneurs in developing the industrial parks,
which in turn catalyzed investment from U.S. multinationals.
Further development of the legal framework sought to create more
backward linkages by extending many of the tax-free and duty-free
incentives to local producers outside the free zones. The evolution culmi-
nated in 1998, with the declaration of the entire national territory as a
Free Zone Area (Decree No. 131-98).
Effective use of Preferential Trade Agreements

The United States traditionally has been Honduras’ largest trading part-
ner, and U.S. policies providing preferential treatment to Honduran prod-
ucts have had a significant impact on Honduran exports. The Caribbean
Basin Initiative (CBI) was initiated by U.S. President Ronald Reagan and
came into effect on January 1, 1984, as a unilateral and temporary pro-
gram. It offered preferential market access to several countries in Central
America and the Caribbean for exports of clothing and apparel to the
United States. It was part of U.S. policy to combat political movements
through aid and trade. With CBI in place, Honduran producers did not
have to pay duties on reexported inputs, such as textiles and fabrics, of
U.S. origin, but only on local value added. In 1990, the U.S. passed the
Caribbean Basin Economic Recovery Expansion Act (CBI II), which
made the incentives in the CBI permanent. Thus, in the period from the
late 1980s into the early 1990s, when the legal framework was fine-tuned
to facilitate investment in industrial parks and to attract FDI, the devel-
opment of preferential trade agreements was also working strongly in
Honduras’ favor.
The impact of CBI-induced trade preferences was reduced signifi-
cantly following the passing of the North American Free Trade Agreement
(NAFTA) in 1994. Mexico was a major competitor in the clothing and
apparel sector, and the implementation of NAFTA offered Mexican pro-
ducers new preferences to the U.S. market in relation to Honduran pro-
ducers. However, in 2000, the U.S. passed the CBTPA, which provided
renewed trade preferences for Honduras’ producers. In particular, the
CBTPA extended preferential tariff treatment to textile products assem-
bled from U.S. fabric that previously had been excluded from the CBI.
This boosted the use of local content in the production value chain and
resulted in significant investment in textile mills in Honduras. According
to the Maquila Association of Honduras, CBTPA shifted the incentive
structure from the previously preferred solution of importing all input
material from the United States to using locally produced input material.
Today, roughly 60 percent of inputs are produced in Honduras, although
most of the intermediary goods used in the production process are pro-
duced in the domestic free zone environment. This production used to be
less than 10 percent in the 1980s and parts of the 1990s.
On April 1, 2006, Honduras ratified and implemented DR-CAFTA,
which covers the Dominican Republic, Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the United States.4 DR-CAFTA provides addi-
tional trade preferences to Honduran producers, although in this case the
rules of origin clause in the agreement led to mixed results for Honduran
producers of clothing and apparel. Rules of origin are applied to dis-
criminate between suppliers, and DR-CAFTA favors U.S. producers of
fabrics to suppliers from cost-effective producers in Asia. These rules of
origin have weakened the supply chain of Honduran clothing manufac-

turers since uncompetitive U.S. mills already were starting to close down
during the DR-CAFTA negotiation.
Government Support for Key Infrastructure and Services

In the initial years of the free zone program, key infrastructure, including
factories, roads, and port facilities, was not yet in place to support the
large-scale investment. The government played a critical role in facilitat-
ing targeted investment for the free zone program, again beginning the
late 1980s and early 1990s. One key program derived from the private
sector debt crisis that affected the country in the late 1980s, forcing sev-
eral important domestic companies to default on their loans. As a part of
a deal to address this crisis, the government agreed to buy corporate
bonds that were then valued at only $0.08–0.12 each for US$1; in return,
the private sector agreed to invest the proceeds in free zones and other
infrastructure. Thus, several free zone industrial parks and the surround-
ing infrastructure were financed by this debt-swap deal, in particular, in
the San Pedro Sula and Puerto Cortés regions.
The government also has played an important role in providing adja-
cent infrastructure. For example, the Honduran government invested in a
number of roads, including between San Pedro Sula and Puerto Cortés,
which attracted investment. Some of these roads are publicly operated
roads with toll systems that recoup public investments. Significant invest-
ments also were made in the port itself, including (most recently) the
designation of Puerto Cortes as a SAFE (Security and Accountability for
Every Port) port under the U.S. Secure Freight Initiative, one of the few
such ports in the hemisphere. Finally, the government also ensured the
implementation of an expedient and effective customs regime for the
free zones. This customs regime has allowed free zone operators to enjoy
rapid and simplified customs procedures, with on-site customs officials
inside each free zone.
Support for Agglomeration

Many countries have sought to use free zones as regional development
tools, and plenty of political leaders have targeted remote or poor areas
where they perceive jobs to be particularly needed. The government of
Honduras initially sought to promote geographic diversification by selec-
tively expanding the zone policy to targeted regions, including the capital
Tegucigalpa, but this approach had little success. As discussed, the gov-
ernment slowly abandoned this regional development approach and, in
parallel with opening up the sector to domestic investors in the late

1980s, it permitted investors to choose to locate where it best suited
them. The market response was to agglomerate around San Pedro Sula
(see box 3.2). Almost 80 percent of all employment in Honduras’ free
zones is concentrated in the Cortés region.
Institutional Support in Marketing and Promotion

FIDE (Foundation for Investment and Development of Exports), the
national export and investment promotion agency, was established in
1984. From its inception, FIDE’s objectives have been to promote invest-
ment, develop export markets, and work closely with the government
and other private organizations to create new legislation aimed at improv-
ing the business climate in Honduras. A key initiative of FIDE was to
Box 3.2
San Pedro Sula: Key Agglomeration for the Export Sector

Although the government had an objective to develop an export sector around
the capital Tegucigalpa (as well as in peripheral regions of the country) and ini-
tially aimed to use the free zone program as an instrument to attract investment
toward Tegucigalpa, it failed to shift capital from the Cortés region, particularly
San Pedro Sula, for several reasons. First, the cost of living is higher in Tegucigalpa.
There is also a scarcity of suitable land. Transporting containers overland is always
a challenge in Honduras given the country’s hilly landscape and security prob-
lems. Manufacturers based in San Pedro Sula benefited greatly from its proximity
to Puerto Cortés, which is the country’s entry and exit point of seaborne goods.
The San Pedro Sula region also had a first mover advantage. It hosts a number
of influential industrial families, including the Rozenthal, Canahuati, and Facousse,
who had established small clothing and apparel businesses even before the
enactment of the free zone Law. The availability of local suppliers was attractive
to investors who sought proximity to the value chain. In addition, the San Pedro
Sula cluster offers economies of scale in the supply of input services for the kind
of service support sectors required by local entrepreneurs and foreign investors,
like international schools, health services, financial institutions, supermarkets, and
recreational activities like golf courses. Access to international transport services,
logistics, land, human capital, local entrepreneurs, and so on has been crucial in
San Pedro Sula’s rise as a hub of the free zone manufacturing sector.
Source: Author.
establish export promotion offices in Florida, Atlanta, and New York to

nurture networks and connect Honduran exporters and zone operators
with companies in leading U.S. centers of textiles and clothing produc-
tion. This policy was successful and much valued by Honduran-based
companies that benefited from the contacts established by FIDE and the
investment that was generated through its work. FIDE also worked
closely with key leaders in the domestic sector, for example, organizing
visits in the middle of the 1980s, during which a number of local leaders
of industrial families visited free zones in other countries, including in
Asia and the Dominican Republic, to learn from their experiences.
Dynamic and Entrepreneurial Domestic Private Sector

The Honduran government realized early the need for private sector
participation in the establishment of free zones. It was not until the enact-
ment of the EPZ law in 1987 and the associated end in government dis-
crimination between domestic and foreign manufacturers that investment
in free zones gathered momentum. The domestic industry’s investment
in zone infrastructure and the establishment of manufacturing companies
catalyzed FDI. The free zone industry now is almost entirely made up of
private zone operators and private companies. The ZOLI (zona libre)
Puerto Cortés is the only publicly operated zone—this zone never
expanded much beyond its initial development phase and now hosts only
11 total companies.
Although domestic entrepreneurs have played an increasingly impor-
tant role as investors in free zone companies—for example, between
2000 and 2007, Honduran companies in the free zones grew by almost
700 percent, or from 13 to 103 companies—it was the role of local indus-
trialists in establishing the free zone industrial parks in the later 1980s
and early 1990s that was critical to catalyzing FDI into the sector, which
in turn spurred rapid growth in exports and employment (see box 3.3).
The poorer the business environment in a country, the more important
is the role of the zone operator and the quality of the services it provides.
The zone operator offers a security buffer to a sometimes-turbulent
external business environment as well as a range of support and facilitat-
ing services that are tailored to the client’s specific needs. This has very
much been the case in Honduras, which ranks 141 out of 183 countries
in the World Bank’s Doing Business Index (World Bank 2009), behind all
the countries in Latin America and the Caribbean except Bolivia, Haiti,
Surinam, and Republica Bolivariana de Venezuela. In this context,
Honduran zone operators also have played an important role in providing
Box 3.3
The Critical Role of Domestic Investors in Attracting FDI

Investment in the establishment of an industrial park takes several years to pro-
vide a return on the investment: in good conditions, around 7–12 years. It is a
chicken and egg problem in which companies want to locate to free zones where
everything is in place. Thus, there are large upfront investments that take time to
recoup. This is arguably the main reason why the free zones in Honduras are
owned and operated by domestic companies.
In a historically volatile region like Central America, foreign investors also want to
see that domestic companies are taking on the risk and commitment by investing
in bricks and mortar. Investment by domestic entrepreneurs signals to foreign inves-
tors that returns are possible. For Honduras, attracting an anchor investment—
a leading MNC like Arrow, Gildan, Hanes, or Sara Lee—sent an important signal
to prospective investors. It created interest among competitors who routinely
benchmark their operation to those of their competitors and thus positioned
Honduras on the map for production centers of textiles and clothing. In addition,
it was equally important for the first greenfield investors to get a good start in
Honduras because they soon became “salespeople” for the country.
Source: Author.
an environment that allows manufacturers to focus on their operations

without major distractions from the challenges that affect entrepreneurs
outside the zones. As one zone operator expressed it, “a customer [foreign
investor] who gets exposed to government-related corruption and other
problems gets scared and wants to leave. The maquila operator functions
as the interface that sorts out all the issues behind the scene, leaving the
companies to do what they do best, which is manufacturing.”
The increasing sophistication of the services offered by zone operators
is striking. For example, some parks offer “shelter plans” for particularly
footloose companies. These plans include everything from servicing the
real estate to the provision of administration services, such as payroll and
human resource services. The zone operator provides the labor for lease
to manufacturers. Free zones like ZIP Buena Vista and ZIP Choloma
provide engineers and builders that can be hired for short-term jobs.
Some zone operators thus are becoming manpower agencies as well as
real estate agents. And manufacturers increasingly are willing to pay for
these value-added services.
Challenges for the Future

More than three decades following the enactment of the Free Zone Law,
Honduras can boast a fairly sizeable export industry. However, it faces a
significant challenge to diversify, both in terms of product categories that
are being exported and the geographic coverage of the zones. Diversifi-
cation will require a significant shift in the approach by both government
and the private sector. Most important, the government must be willing
to forego protecting existing interests and thus avoid the risk of stasis in
the free zone sector, which ultimately will result in the continuing stag-
nation and decline of investment, exports, and, perhaps most important,
employment.
After several years of sustained investment and increased exports, the
maquila industry was hit by the global economic downturn that struck in
2008. The downturn affected U.S. sales of both automobiles and clothes,
which make up the great majority of exports from Honduran free zones.
The former sector was severely hit as sales by the three U.S. automobile
manufacturers dropped and General Motors and Chrysler went into
Chapter 11 administration. Honduran textiles and clothing producers
already were affected by Asian competition in the post-MFA environ-
ment, and the global economic downturn may well have accelerated the
shift of U.S. clothing assembly to Asia. From a peak of 134,000 workers
in 2007, employment in Honduras’ free zones had, according to estimates
provided by industry experts, dropped to approximately 100,000 work-
ers in May 2009. The Maquila Association of Honduras argues that many
zone operators are in debt and 50 percent of their plots of land are empty.
Workers who lose their jobs often move to the informal sector or seek
employment opportunities in the United States. However, migration to
the United States has become increasingly risky as many migrants are
losing their jobs there. Workers who have been employed in the free
zones for many years are not necessarily attractive candidates on the job
market, and many workers struggle to find new jobs.
Next to the global economic downturn, the free zone industry has
faced several external shocks in the last few years. First, the domestic cur-
rency, the lempira, which is pegged to the dollar, has appreciated in rela-
tion to other currencies of leading exporters of wire harnesses and textiles
and clothing products. For example, the Mexican peso depreciated by
28 percent in relation to the U.S. dollar (and hence the lempira) on the
year to June 30 2008 to 2009. The macroeconomic climate is not favor-
able and the risks associated with inflation keep interest rates high and, as
a result, for those who can (many cannot) borrowing from abroad is the
favored option. Second, on January 1, 2009, the national minimum wage
was raised by 60 percent to 5,500 lempira (US$297). Although the free
zone industry managed to negotiate an exemption from this raise, it still
increased the cost of many of the goods and services in the production
supply chain.
Third, Honduras’ growing crime—fueled in part by a squeeze on orga-
nized crime in Colombia and Mexico and the subsequent migration of
criminal elements to the region—is scaring off some investors and adding
security costs to company operations. For example, security personnel
need to protect the factories and the zones, all workers are screened to
ensure that criminal gangs do not infiltrate businesses, and containers
need to be protected during transportation.
Finally, international competition, especially from China, is increasing
the pressure on free zone companies to make more use of technology and
raise labor productivity. The big dislocation of textiles and clothing pro-
duction from the United States to Latin America and the Caribbean that
took place in the 1990s is to a large extent complete. North American
clients are now benchmarking their production matrixes in Latin America
with those in Asia. Consequently, Honduras is facing competition from
China and Bangladesh rather than Atlanta, North Carolina, or Mexico.
And the requests by foreign investors are increasing. Twenty years ago,
they would be pleased with the cost of labor, the proximity to the U.S.
market, and the services offered in the port. Today, as one zone operator
put it, “they ask if the country has global ambition; if we have FTAs with
other countries; about the sources, cost and reliability of electricity; how
many training centers we have; the level of expertise, etc., because
Honduras is not so inexpensive anymore.”
Employers in the free zones have responded by attempting to address
productivity through increased training and incentives like production-
linked bonus schemes, free breakfast and dinner for workers who arrive
early to the factory or leave late, childcare provided on weekends, and so
on. But while improving productivity with the help of capital, technology,
and incentives is reducing the demand for labor, this improvement may
be somewhat at odds with the government’s main objective of employ-
ment creation through the free zone program.
Although productivity increases certainly are required, in light of the
challenges the free zone sector is facing, it is clear that a competitive posi-
tion based on low-cost production of garments (and wire harnesses) for
sale to the U.S. market, is unlikely to be sustainable. Therefore, the
strategic focus of the free zones must be on diversification outside the

traditional garment sector and upgrades (moving into higher value added
activities inside or outside the garment sector).
The relatively recent establishment of the wire harness industry was a
significant step in terms of product diversification. UTI, later Lear
Corporation, located in Nacu, outside San Pedro Sula, and suppliers like
Alcoa (metallic wires) and a number of French companies (producing
tubes) followed in its steps. Honduras lacks the establishment of the
entire value chain, which makes them sensitive to competition. One of
the key strengths of the country’s free zone sector is the comprehensive
and efficient services package offered by the zone operators, but these
operators often are garment manufacturers. These operators have found
it difficult to diversify into new sectors and largely have failed to attract
a more diverse set of investors. Despite an industry-neutral incentive
structure, only textiles, clothing, and wire harnesses have gathered sig-
nificant investment (see figure 3.2).
The textiles, clothing, and apparel sectors still have scope for diversifi-
cation. For example, Honduras does not produce synthetics and this is
a multibillion dollar market. Honduras may be the leading producer
Figure 3.2 Gross Value of Production in Maquilas

(lempira, millions)
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2000 2001 2002 2003 2004 2005 2006* 2007*
textiles and clothing car parts and wire harnesses
other manufacturing industry food products
tobaco products other industry

of underwear and T-shirts for the U.S. market, but it is not one of the
10 leading producers of nylon production. Tariffs are lower for the former
two products, but they have not taken advantage of the tariff preferences
they enjoy in the U.S. market. Additionally, agriculture, fishery, and
tobacco processing activities exist in some free zones, but these are rela-
tively small businesses. The Atlantic Coast is processing fruits and the
Pacific Coast hosts shrimp and melon farms. Currently, interest seems to
be high in the export potential of call center services. Some zone opera-
tors are assessing the requirements to attract foreign call center compa-
nies. As of May 2009, however, no call center company had yet located
to Honduras.
One critical factor in the challenge of diversification is the need to
upgrade the skills of the free zone workforce. The traditional garment
assembly operations, however, historically have provided only minimum
training and skills development. The maquilas have worked in PPPs to
develop vocational training for maquila workers. But, in general, maquila
workers are relatively low skilled and possess limited formal education
(see box 3.4 for an initiative to address vocational training).
Despite the significant success of domestic investors in the free zone
sector, and the critical role played by the effective interaction between
the government and the private sector, they may also be a source of
lock-in, limiting the scale and speed by which the necessary processes of
adjustment take place. One reason for this limitation is that the majority
of free zone developers and operators in Honduras are not real estate
developers, but rather they have direct interests in the textiles and gar-
ment manufacturing sector. As such, their primary interest tends to be on
salvaging competitiveness in their traditional activities, rather than per-
haps focusing on attracting more diversified tenants into their zones.
More broadly, the privileges enjoyed by the free zone sector can be a
powerful disincentive to reform. For example, in the 1980s and early
1990, the Honduran government offered exchange rate convertibility in
the free zones. This policy is likely to have accelerated the devaluation
of the Honduran lempira. The government faced increased pressure
from the free zone industry to provide greater exchange rate incentives.
This led to a macroeconomic distortion, which is likely to have under-
mined the currency. Indeed, while the government of Honduras at times
has been open to reforming the legal framework to better suit local and
foreign market conditions, it has not strategically leveraged the free zone
policy for more comprehensive policy reform that could benefit all
investors and entrepreneurs.
Box 3.4
Instituto Politécnico Centroamericano

Instituto Politécnico Centroamericano (IPC) is a nongovernmental, nonprofit,
vocational training institute that was founded in 2005. An assessment of Hondu-
ras vocational training system had concluded that the system was broken: instruc-
tors were incapable of teaching and 95 percent of equipment was stolen, broken,
or irrelevant. Based on these findings, IPC was established to design courses for
current and future workers in all sectors of the economy, including in manufactur-
ing and textiles and clothing. The institute’s objective is to provide workers with
relevant skills demanded by industry. Its curricula hence are influenced strongly
by input from employers. IPC strives to offer the best technical equipment, curri-
cula, and test instructors in the region. For example, a majority of the 12 instructors
are brought from North America, Europe, and Latin America. In the spring of 2009,
IPC had 270 full-time students and some 1,400 workers that were upgrading their
skills in courses lasting between 2 and 18 weeks. A majority of the graduates join
the free zone companies: for example, Gildan, the Canadian company that spon-
sored the above-mentioned study, hires 60 students from IPC every year.
Nine students out of 10 come from large families earning less than US$300 per
month and the fee for a year of full-time training is US$1,500. The expenses are
partly covered by companies, charitable organization, and governments—for
example, a U.S. nongovernmental organization (NGO) covers transportation and
a daily meal; a Swiss company that supplies chemicals to the textiles industry
donated a chemistry lab; a French company provided design equipment; and an
Italian company donated sewing equipment. Roughly 95 percent of the stu-
dents receive a corporate scholarship that covers 75 percent of the fee. In return,
they commit to work for the sponsor for two to four years. Foreign MNCs are car-
rying most of the expenses, whereas Honduran companies are less willing
to invest in training and retraining—a pattern that is common throughout the
developing world.
Source: Author, based on information supplied by IPC.
Conclusion
Honduras has more than three decades of experience of hosting free
zones. It took approximately a decade and a half following the enactment
of the Free Zone Law in 1976 before the policy had a significant eco-
nomic impact. In addition to U.S. demand, the key to takeoff in the early
1990s was the fact that all the crucial conditions with regard to infra-
structure, free zone policy, trade policy, and committed domestic inves-
tors were in place. When foreign MNCs started to shift their assembly
lines to Honduras, the small Central American republic with its turbulent
political past (and present) quickly developed into a leading exporter of
textiles and clothing products to the United States.
Over the course of 22 years, the Honduran government enacted sev-
eral pieces of new legislation that broadened the geographic reach of the
free zone policy to finally cover the entire country. The government
learned from its early mistakes: for example, the implicit discrimination
against domestic manufacturers up until the enactment of the EPZ Law
reduced domestic investors’ interest in developing the local free zone
environment and consequently had a discouraging effect on foreign inves-
tors. In more recent years, manufacturers have suffered from the unfavor-
able macroeconomic climate and the difficult security situation, which
raise the cost of capital and risk of doing business.
The country has gotten many things right. The in-house customs solu-
tion is a widely lauded PPP that is expedient and efficient. The profes-
sionally managed Puerto Cortés has been crucial to the competitiveness
of the free zone industry. The zone operators’ decision to differentiate
their free zones from other free zones in the region by investing in quality
infrastructure and focus on providing high-quality services appears to
have been the right strategy. Foreign anchor investments helped signal to
foreign investors that Honduras was a potentially attractive supply base
of clothing for the U.S. market. A professional trade and investment pro-
motion agency also plays a seemingly important role.
Honduras has been fairly successful at developing backward linkages.
The lesson for small economies is that the design of the rules of origin in
trade agreements may have a huge impact on the country’s ability to
sustainably integrate new industries into the domestic economy. Honduras
benefited greatly from preferential market access to the United States
extended first in the CBI and later in DR-CAFTA. The rules of origin
incorporated in these agreements, however, had a huge impact on the
types of textiles and clothing product categories the country exports: at
times, the rules have had a negative effect, and at other times, they have
had a positive effect.
Despite the success of the free zones program, it remains highly con-
centrated in terms of exported product categories and geographic cover-
age of the zones. The government’s selective geographic expansion of free
zone policy did not have any significant effect, and the zone operators
have not been particularly effective at broadening the scope of investors.

This situation indicates the bluntness of the free zone policy tool and the
difficulty of using it for industrialization purposes. Increasing interna-
tional competition, especially from China, has taught the free zone indus-
try that it constantly needs to adapt, make use of technology, and raise
labor productivity if it wants to remain in business. Addressing the latter
will require a greater attention to skills development at all levels.
Finally, the fiscal incentive structure that the government of Honduras
offers companies with free zone status, including time unlimited exemp-
tion from taxation and duties, is generous from an international perspec-
tive. This incentive regime undoubtedly has played a role in attracting
investment into the free zones program both from FDI and local inves-
tors. But it also has created a dual economy that is sustained by the gov-
ernment’s disinclination or inability to address issues that impede the
private sector. The application of the Free Zone Law discriminates against
small and midsize manufacturers, and prospective exporters thus may be
left out of the business. The private sector would benefit in the long term
if the government provided a more equal incentive structure for small
and large companies, producers of services and goods, and exporters and
companies producing for the domestic market alike.
Exclusivity has proven to be a powerful force against comprehensive
reform and has contributed to stasis in the free zone sector. Although the
government of Honduras at times has been open to reform the legal
framework to better suit local and foreign market conditions, it has not
strategically leveraged the free zone policy for more comprehensive pol-
icy reform that could benefit all investors and entrepreneurs.
Notes
1. The term maquiladora derives from the practice of millers charging a maquila
(“miller’s portion”) to process other people’s grain. This chapter uses the
terms maquila and free zone interchangeably.
2. Law Establishing the Free Zone of Puerto Cortés (Ley Constitutiva de la Zona
Libre de Puerto Cortés, Decree No. 356).
3. On some rare occasions, the government has provided fiscal incentives linked
to training to specific companies. For example, Lear Corporation received
some fiscal incentives to train 100 employees.
4. In addition, Honduras has signed trade treaties with Mexico and currently is
in the process of negotiating preferential tariff arrangements (PTAs) with
Chile, Colombia, the European Union, Panama, Taiwan, China, and Canada.
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MSN (Maquila Solidarity Network). 2005. “Honduras: The Gildan Story.”
Toronto: Maquila Solidarity Network.
World Bank. 2009. Doing Business 2010: Country Profile for Honduras, Comparing
Regulation in 183 Economies. Washington, DC: World Bank. www.doingbusiness
.org/ExploreEconomies/?economyid=86
WTO (World Trade Organization). 2003. “Trade Policy Review Honduras.”
Report by the Secretariat, WT/TPR/S/120, August 29. Geneva: World Trade
Organization.
CHAPTER 4
China’s Investment in Special

Economic Zones in Africa
Deborah Brautigam and Tang Xiaoyang
China’s Overseas Special Economic Zones: Aims and Objectives

In 2006, as part of the implementation of its 11th five-year plan, the
Chinese government announced that it would establish up to 50 overseas
economic and trade cooperation zones. In the experimental manner that
characterizes many Chinese policy innovations, the rollout of these zones
has been gradual. In Africa, two competitive tenders (discussed in
section 2) have led to the selection of seven proposals for overseas zones,
all of which became eligible for incentives from the Ministry of Commerce
and other Chinese government agencies. This chapter outlines the back-
ground of this policy innovation, describes the current status of the seven
African zones, sheds light on the variety of mechanisms by which these
zones have been established and operated, provides a preliminary assess-
ment of the benefits and drawbacks of the zones, and provides recom-
mendations that might be helpful in allowing African economies to fully
maximize potential benefits from these investments. The chapter draws
on the authors’ field research,1 as well as on a literature review and tele-
phone interviews.
69
Background
China’s efforts to attract foreign investment relied at first on SEZs. In
1979, four SEZs were established in the southeastern coastal region of
the country (a fifth zone was later added on Hainan Island). These were
patterned after similar zones established in Taiwan, China; the Republic
of Korea; Singapore; and Hong Kong, China. In 1984, 14 Chinese coastal
cities set up industrial and technological development zones, many of
which nurtured clusters targeting a particular industry. More than a hun-
dred zones of various kinds now have been established around the coun-
try, offering low taxes2 and infrastructure at international standards. These
zones have become one of the principle means by which the Chinese
government, at the local, provincial, and national levels, provides prefer-
ential policies to foster the development of technology and industry.
China has some experience with international partnerships in the
development of these zones. In 1983, the Japanese government helped
develop a master plan for the port of Qingdao, and in the early 1990s,
Japan’s International Cooperation Agency (JICA) provided foreign aid for
the Jiaozhou Bay Highway, a railway, and a sewage treatment plant, all
connected to the Qingdao Economic Development Zone. In 1993 and
1994, the Jiangsu province cities of Wuxi and Suzhou developed indus-
trial parks with Singaporean partners to learn from Singapore’s model.
These zones were run on a commercial basis, as joint ventures. The
Singaporean interests held majority shares, and took the lead in develop-
ing and marketing the zones until around 2001–02 when the capital and
management were restructured and Chinese interests became the major
shareholders and decision makers in both zones. The Chinese government
closely followed this process: the Suzhou zone even had a vice premier
as chairman of its board. In recent years, several Chinese development
zones have invited institutes from the U.S., Japan, Australia and U.K. to
participate in planning.
In the mid-1990s, after nearly 20 years of “bringing in” (yin jinlai)
foreign investment, technology, and skills, the Chinese government began
to emphasize “going out” (zou chuqu) or “going global.” Going global
involved finding new markets for Chinese goods and services, building up
Chinese brand names, and ratcheting up China’s own foreign investment.
In an experimental fashion, the Chinese government and Chinese com-
panies began to establish overseas industrial and trade zones, as early as
1998. In 2006, a policy decision was made to establish up to 50 special
economic cooperation zones in other countries as a central vehicle for
this aim.
China’s Investment in Special Economic Zones in Africa 71
The China-Africa Development Fund (CADF), a venture capital

instrument set up by one of Beijing’s policy banks, China Development
Bank, is one of the key tools for the going global strategy. First announced
at the November 2006 Summit of the Forum on China-Africa Cooperation
(FOCAC), CADF was established with US$1 billion in assets and is
expected to rise to US$5 billion over time. CADF’s role is to invest in
Chinese companies, Sino-Africa joint ventures, or African companies,
with the commercial objective of at least breaking even. CADF has taken
equity shares in some of the overseas zones projects.
Objectives
Overseas economic zones were believed to meet several strategic objec-
tives. First, they would increase demand for Chinese-made machinery
and equipment, while making it easier to provide postsales product sup-
port. Second, by producing overseas and exporting to Europe or North
America, Chinese companies would be able to avoid trade frictions and
barriers imposed on exports from China. Third, the zones would assist
China’s efforts to boost its own domestic restructuring and move up the
value chain at home.3 Fourth, they were intended to create economies
of scale for overseas investment, and in particular, to assist less experi-
enced small and midsize enterprises to venture overseas “in groups.”
Finally, fifth, they were viewed as a way to transfer one element of
China’s own success to other developing countries, a strategy that the
government believed would be helpful for recipient countries, while also
benefiting China. These multiple objectives mean that Chinese compa-
nies also have a variety of objectives in constructing and investing in
these zones. Indeed, evidence from the zone in Egypt, which is the most
advanced of the projects, supports the perspective that companies
investing in the Chinese zones are not following one model. Some
Chinese manufacturers in the zone are producing for the European mar-
ket (garments), others are serving the Egyptian market (oil rig assembly,
women’s sanitary products), and yet others are exporting back to China
(marble).
Brief History of China’s Overseas Economic Zones

The policy established in 2006 built on earlier overseas experiments. For
more than a decade, Chinese companies already had ventured into estab-
lishing a variety of overseas industrial and trade zones. For example, in
1999, the Chinese government signed an agreement with Egypt to assist
in the establishment of an industrial zone in the Suez economic area. Also
in 1999, the giant Chinese appliance firm Haier built its first industrial
complex outside of China: a 46-hectare industrial park in South Carolina,
United States. Fujian Huaqiao Company built an industrial and trade
zone in Cuba in 2000. In 2001, Haier and a Pakistani company, Panapak
Electronics, constructed a joint industrial park near the Pakistani city of
Lahore. A Chinese company began to implement an industrial zone in
the Chambishi area of Zambia in 2003. In 2004, China Middle East
Investment and Trade Promotion Center and Jebel Ali Free Trade Zone
constructed a US$300 million trade center, designed to host 4,000
Chinese companies in Dubai. Similarly, also in 2004, Tianjin Port Free
Trade Zone Investment Company and the United States Pacific
Development Company set up a Chinese trade and industrial park in the
South Carolina city of Greenville.
Thus, the decision to establish overseas zones as a part of the going
global policies was made after Chinese companies already had set up
industrial and trade zones overseas. China’s Ministry of Commerce and
the National Development and Reform Commission studied the experi-
ence of these companies in formulating the policies of support.
China’s Overseas Zones in Africa: Current Situation

Chinese support for the development of “economic and trade coopera-
tion zones” is not limited to Africa. To date, the Chinese government has
selected 19 overseas zone proposals (see appendix 4.A) across 15 coun-
tries for official support under the going global policies. Seven of these
projects, across six countries, are in Africa (five projects in four coun-
tries are located in Sub-Saharan Africa with two in North Africa), with
the goal of developing at least 10 overseas Chinese economic and trade
cooperation zones during the 11th five-year plan (2006–10), and stimu-
lating overseas investment of US$2 billion from some 500 Chinese
companies.4 These zones are not expected to conform to a single model.
They can be science and technology parks, manufacturing and process-
ing bases, or multiuse facilities. They can emphasize domestic markets
(import substitution) or export processing. In addition, some mainland
Chinese and Hong Kong, China, companies have established industrial
estates and other spatially delimited areas for trade, logistics, or manu-
facturing in Africa and elsewhere, outside of the scope of official gov-
ernment support.
This section outlines the overall plans for the zones. Their results to
date are discussed in Part IV, “Progress, Challenges, and Potential.”
China’s Seven Approved Zones in Africa

China’s Ministry of Commerce has approved seven African zones for
special funding under the going global initiatives; six had commenced
construction as of November 2009. These zones are located in Zambia,
Mauritius, Egypt, Ethiopia, Nigeria (two), and Algeria. This section pro-
vides an overview of the seven zones, including their location, partici-
pants, investment, industry focus, and current status. It discusses the
future of the Chinese initiative and briefly looks at Chinese investments
in industrial parks and other SEZs in Africa, but outside of the special
initiative. In addition to these seven zones, other Chinese companies and
provincial governments have experimented with the establishment of
industrial parks and free trade zones in Africa. Some of them sent propos-
als to the Ministry of Commerce (MOFCOM) tenders, but did not win.
Most are quite recent, and their experiences vary widely: some failed at
an early stage, but others have survived and grown. In comparison with
the seven official zones, their sizes vary, forms are more diversified, and
strategies are more flexible. Among these are the Guoji Industry and Trade
Zone in Sierra Leone, the Nigeria Lishi-CSI Industrial Park, Linyi
(Guinea) Industrial Park, China Daheng Textile Industrial Park in
Botswana, and the Shandong Xinguang Textile Industrial Park in South
Africa. Several other proposals for industrial parks or zones have been
mentioned in various media, but they either are at an early stage, remain
under discussion, or failed to begin.
Zambia-China economic and trade cooperation zone/Chambishi

multi-facility economic zone. China Nonferrous Mining Co. (CNMC
Group) began planning the Zambia-China Economic and Trade
Cooperation Zone in 2003 in Chambishi, about 420 kilometers north
of the capital of Lusaka. CNMC’s decision to open a zone for mineral
processing and related industries allowed the company to make full use
of the 41-square-kilometer surface area of its Chambishi copper mine.
In 2006, CNMC won official support from MOFCOM for the
Chambishi zone. In a sign of the political importance of this initiative,
in February 2007, China’s president Hu Jintao presided at the opening
ceremony of the zone.
The Chambishi Zone focuses on the value chain of copper and cobalt:
mining, processing, recycling, machinery, and service. It aims to attract
50 to 60 enterprises, create some 6,000 jobs for Zambians, and reach an
annual output of more than US$1,500 million by 2011. By July 2009,
11 enterprises had been established in the zone, including the Chambishi
copper mine, copper smelters, a sulfuric acid plant, and a foundry, for a
total investment of US$760 million.
CNMC’s Lusaka subzone project, adjacent to the Lusaka airport, was
launched, at least symbolically, in January 2009. The zone is planned to
have an area of 5 square kilometers. A master plan for the zone is
expected to be completed by the end of 2009, with construction slated
to begin in 2010. Although the focus of the zone remains to be deter-
mined, CNMC has indicated a wish to focus on services (hotels, a confer-
ence center), light industries such as food and tobacco processing, and
assembly of home appliances and electronics. The strategic purpose of the
Lusaka subzone may be to diversify out of resource-intensive investment
as well as to accommodate the Zambian government’s desire for urban
employment opportunities. China Development Bank has set up a
Zambia team to provide funding support for the zones and CNMC
activities in Zambia. The Chambishi and Lusaka zones were the first of
five Multi-Facility Economic Zones (MFEZs) planned by Zambia.
Malaysian interests are also constructing an MFEZ near Lusaka, with
technical assistance from JICA.
Egypt Suez Economic and Trade Cooperation Zone. Egypt Suez Economic
and Trade Cooperation Zone is located in Sector 3 of the North-West
Suez Canal Economic Area just outside Egypt’s new deep-water Sokhna
Port, just below the southern entrance of the Suez Canal, 120 kilometers
from Cairo. It is being developed by Egypt TEDA Investment Co., a joint
venture between Tianjin Economic-Technological Development Area
(TEDA) Investment Holdings, Egyptian interests, and the China-Africa
Development Fund. The Suez project has a long and complicated history
(see box 4.1). Discussions on a transfer of China’s experience were initi-
ated by Egypt in 1994. TEDA Investment Holdings was tasked by Beijing
to set up a zone project in the Suez area in 1998. A joint consortium,
Egypt-Chinese Corporation for Investment (ECCI), was set up to imple-
ment this initial project. TEDA relied on the experience of their Egyptian
partners to learn how to operate in Egypt. The venture began long before
the area infrastructure was complete and the initial years were not very
successful, but with time a number of companies have set up operations
in Sector 3 of the zone.
In November 2007, TEDA participated in the second tender of
MOFCOM for overseas zones. After winning the bid, they bought addi-
tional land in Sector 3 of the zone and formed a new joint venture with
Egyptian interests. The zone builds on the earlier investment and will be
Box 4.1
Timeline: Tianjin TEDA in Egypt

1994 Egypt and China begin discussion of cooperation in economic zone
development.
1998 Chinese and Egyptian governments sign a memorandum of understand-
ing to construct a free trade zone in North-West Suez. TEDA assigned the
task. Sets up Suez International Cooperation Co.
1999 ECCI was formed by TEDA, Arab Contractors Co., National Bank of Egypt,
National Investment Bank, and the Suez Canal Authority. TEDA had 10 per-
cent of the shares. ECCI acquires rights to 21.95 square kilometers of land
in NWSEZ (all of Sector 3).
2000 TEDA sets up Suez International Cooperation Co., which is 100 percent
TEDA because they believed the joint venture business plan was not via-
ble. They plan to develop 1 square kilometer for small and medium
enterprises (SMEs) on their own. They started construction.
2003 After slow start, ECCI releases most of its land rights in Sector 3, retaining
6 square kilometers. The infrastructure is established. Some companies are
established (a marble company).
2004 January. Egypt-China Joint Working Group established to boost coopera-
tion at zone. TEDA concentrates on Sector 3 of North-West Suez, 1 square
kilometer. White Rose (a Chinese textile machine company), drilling
equipment joint venture, and companies in steel tableware, luggage, and
women’s sanitary products.
2004 October. International Development Ireland wins contract to design over-
all plan for Suez zone and trains staff of Egypt’s General Authority for Free
Zones and Investments (GAFI).
2007 November. TEDA’s proposed Suez Economic and Trade Cooperation Zone
won the Chinese MOFCOM tender.
2008 July. Egypt TEDA established by TEDA (75 percent), ECCI (20 percent), and
Suez International (5 percent) to develop the industrial park over three
3-year phases.
2008 October. China-Africa Development Fund signed an agreement to invest
in TEDA’s Suez Economic and Trade Cooperation Zone. They set up a
new holding company with TEDA (on a 60%/40% ownership basis).
This new company now holds the 75 percent of shares originally held by
TEDA.
Box 4.1 (continued)
2009 March. Chinese-Egypt TEDA wins Egyptian tender for SEZ development in
North-West Suez.
2009 July 17. TEDA and Egyptian government sign contract to develop part of
Sector 3 in North-West Suez as an SEZ. TEDA will invest US$280 million for
infrastructure within zone.
2009 November. Chinese and Egyptian premiers presided at the opening cer-
emony of the North-West Suez Special Economic Zone in Sector 3.
Source: Authors.
established on a cluster model. Currently plans exist for four clusters:

textile and garments, petroleum equipment, automobile assembly, and
electrical equipment. In the second phase, electronics and heavy indus-
tries may be added (Interview, Vice Director of the Suez TEDA Zone,
2009).5 As of July 2009, 16 enterprises already had moved into the first
one square kilometer start-up zone. This start-up phase is planned to
conclude around 2011, when the zone aims to have around 50 compa-
nies. Chinese companies with high energy consumption and high labor
intensity are especially encouraged to invest in this zone.
In March 2009, TEDA won an international Egyptian tender, compet-
ing against 29 other companies for the right to develop Egypt’s first
“Chinese-style” SEZ (“Chinese-style” means that part of the zone will be
developed for residential use). Phase I of the SEZ is located in an unde-
veloped portion of Sector 3 of the North-West Economic Zone. It will
develop approximately 6 square kilometers (600 hectares) out of the
available area of 20.4 square kilometers, adjacent to TEDA’s existing
Sector 3 industrial development. TEDA’s investment in infrastructure
and basic construction was expected to amount to between US$200 mil-
lion and US$280 million.
Ethiopia Eastern Industrial Park. The Ethiopia Eastern Industrial Park

is located 30 kilometers from Addis Abba. It originally was formed by
two private Chinese steel product makers: Yonggang Group and Qiyuan
Group from Zhangjiagang city. Qiyuan initiated the idea of building an
industrial zone in Ethiopia and the participation of Yonggang, a much
larger conglomerate, guaranteed financing so that it won the second
MOFCOM bidding in 2007. Later, two additional Zhangjiagang compa-
nies, Jianglian and Yangyang Asset Management, joined the project.
Zhangjiagang Free Trade Zone was brought in as a technical partner, but

not as a shareholder. Because of financial difficulties, however, Yonggang
left the project early in 2009 and the smaller company, Qiyuan, has
become the major shareholder and executor (Interview, Eastern
Industrial Park Management, 2009). Originally, the park planned to
attract 80 projects in five years and create 10,000 to 20,000 jobs for
Ethiopians. This plan will be subject to substantial revision after the
capital restructuring.
Because of the Chinese partners’ financial difficulties (related to the
global economic crisis), the area of the zone has been reduced from
5 to 2 square kilometers (500 to 200 hectares) and the investment from
renminbi (RMB) 1 billion (US$146 million) to RMB 690 million
(US$101 million). The start-up area is 100 hectares and is expected to
cost US$22 million to launch. It currently is under construction, with an
expected completion date of 2010. The zone developers still are negotiat-
ing with China Eximbank for loan finance (Foreign Trade Information and
Survey Newsletter 2009), while CADF is also studying the feasibility of
equity participation. Meanwhile, the first project in the zone, a cement
plant, began production in 2010. Eleven enterprises with US$91 million
total investment have signed letters of intent to move in—these enter-
prises cover such industries as construction materials, steel products
(plates and pipes), home appliances, garment, leather processing, and
automobile assembly.
Mauritius Jinfei Economic and Trade Cooperation Zone. JinFei Economic

and Trade Cooperation Zone is located in Riche Terre, an undeveloped
area 3 kilometers northwest of Port Louis, near the Free Port. The sole
original developer was the Shanxi province Tianli Group, a provincial
SOE active in trade, construction, real estate, and textiles. Tianli arrived
in Mauritius in 2001, establishing a state-of-the-art spinning mill, which
since has expanded several times. Tianli’s plant supplies much of the
demand for cotton and synthetic thread in the Mauritius textile industry,
as well as exports to other countries.
Tianli’s proposal for an overseas zone was one of the winners of the
first MOFCOM tender in 2006. Securing land and resettling farmers
caused delays, however, and the zone ran into further difficulties after the
developer was hit by the global economic slowdown. The Chinese central
government then instructed Shanxi province to coordinate capital
restructuring of the Tianli zone. Two much bigger partners, Shanxi
Coking Coal Group and Taiyuan Iron and Steel Company, joined the
team. CADF also invested in the zone. Construction finally began on

September 16, 2009.
The zone has an area of 211 hectares; the first development phase is
on 70 hectares (0.7 square kilometers) with an expected investment of
US$220 million. On completion in early 2012, the zone is expected to
provide a manufacturing and service base for Chinese enterprises doing
business in Africa. A second phase, targeted for 2016, aims to focus on
solar energy, pharmaceuticals, medical equipment, and processing of sea-
food and steel products, as well as housing, hotels, and real estate. If fully
implemented, the total project is estimated to cost US$720 million and
hopes to create from 30,000 to 42,000 jobs.
Nigeria Lekki Free Trade Zone. The Lekki Free Trade Zone (LFTZ) is
located 60 kilometers east of Lagos alongside a new planned deepwater
port. The project is a joint venture between a consortium of four
Chinese companies and Nigerian interests, including the Lagos state
government. The government of Lagos state provided 165 square
kilometers (16,500 hectares) of land—of which 30 square kilometers
(3,000 hectares) has been officially transferred to the joint venture so
far—and the right to a 50-year franchise. CADF also will provide equity
finance, and a proposal to include CADF on the board of directors still
is under negotiation.
The project was initiated in 2003 by China Civil Engineering
Construction Corp. (CCECC), which has been operating in Nigeria for
more than a decade. In March 2006, a Chinese consortium, CCECC-
Beiya (“Beyond”), was set up in Beijing. In May 2006, the consortium
partnered with Nigerians to establish the LFTZ Development Co. In
November 2007, the Lekki zone won support in the second MOFCOM
tender.
The development of the initial 3,000 hectares is divided into three
phases. The first phase (1,000 hectares) is the official China-Nigeria
Economic and Trade Cooperation Zone. Construction on these 1,000
hectares (designed to support 200 companies) began in October 2007.
An investment of approximately US$267 million is planned for the first
three years and the total investment is estimated around US$369 million.
The zone will be divided into six sections: (1) transportation equipment,
(2) textile and light industry, (3) home appliances and communication,
(4) warehousing, (5) export processing, and (6) living and business.
According to an interview with a Beijing representative of CCECC-Beiya
(2009), this first phase will serve only or mainly Chinese companies.
Sources from the Nigerian partner, however, indicate that the zone is
open to all investors, and the list of investors that have signed MOUs
includes mainly non-Chinese companies. An initial group of companies
(all Chinese) was expected to begin construction in March 2009. In inter-
views management indicated this was expected to be delayed until early
2010; however, this timeline has also slipped.
Nigeria Ogun-Guangdong Free Trade Zone. Nigeria Ogun-Guangdong

Free Trade Zone is located in the Igbessa region of Ogun state, 30 kilome-
ters from Lagos International Airport. Its shareholders include Guangdong
Xinguang International Group, China-Africa Investment Ltd., Chinese
CCNC Group, and the Ogun state government. The project originated
from a 2004 study of South China University of Technology on the fea-
sibility of setting up a Guangdong economic trade cooperation zone in
Nigeria. This report was used for the successful bid by Xinguang
International Group in the first MOFCOM tender in 2006. The project
originally was sited in Imo state, but the developers apparently ran into
high administration fees imposed by the state government, experienced a
general climate of insecurity, and relocated to Ogun state (Soriwei 2008).
This delayed the project, and construction began in Ogun only in the first
half of 2009. By July 2009, several Chinese enterprises had begun to
build staff housing.
The zone has a total area of 100 square kilometers, which will be
developed in two phases. Phase I utilizes 20 square kilometers (2,000
hectares) with an estimated investment of US$500 million; within this,
the start-up zone will be developed on 250 hectares, with an investment
of US$220 million. The zone will focus primarily on light manufacturing,
including construction materials and ceramics, ironware, furniture, wood
processing, medicine, small home appliances, computers, lighting, and
paper. A high-tech agricultural demonstration park may be added in the
future. The developers aim to attract more than 100 enterprises to
the zone within five years, and 700–800 companies within 10 years. As
of the middle of 2010, 36 companies had registered to invest in the zone;
six had begun construction.
Algeria-China Jiangling Free Trade Zone. Algeria-China Jiangling Free

Trade Zone in Algeria will be developed by Jiangling Automobile Group
from Nanchang, Jiangxu province and Zhongding International Group
(there is no local partner at present). Jiangling Automobile, one of China’s
flagship companies, has more than 40 sales agents in Algeria and, by 2007,
had taken one-third of Algeria’s automobile market. Zhongding

International Group is the arm for overseas construction and engineering
of Pingxiang Coal Group (PKCC). PKCC has been operating in Algeria
for more than 17 years and contracted dozens of medium and large proj-
ects there. Responding to MOFCOM’s call for applications, the Jiangxi
provincial government coordinated an effort to link PKCC and Jiangling
Automobile Group, both based in Jiangxi, to establish a platform for the
enterprises of Jiangxi province to go global. They won in the second
MOFCOM bidding round in 2007.
The Algeria zone was projected to have a total investment of
US$556 million and a land area of 500 hectares, with a first development
phase on 120 hectares. It planned to attract 30–50 Chinese enterprises
into an industrial park focusing on automobiles and construction materi-
als. In March 2008, Zhongding International and Jiangling sent a com-
bined team to Algeria for preparation. The zone has been in limbo since
May 2008. Legislative reforms in Algeria’s investment regime, passed in
early 2009, require foreign investors to form joint ventures with Algerian
partners as majority shareholders).6 This may not be acceptable to the
Chinese developers. Negotiations with the Algerian government were still
ongoing as of November 2009 (Interview, Ministry of Commerce Official,
Bejing, China, November 25, 2009).
China’s Overseas Zones: Mechanisms

The Chinese government built on earlier experiences working with
Chinese companies to establish Investment, Trade, and Development
Promotion Centers in Africa and elsewhere, beginning in the mid-1990s,
and studied experiences such as TEDA’s in Egypt. Officials also consid-
ered China’s past difficulties in ensuring that development projects estab-
lished in Africa would be sustainable once Chinese involvement ended.
This dictated a new model of engagement,7 in which the Chinese govern-
ment gave Chinese enterprises incentives to build and operate the
zones.
Chinese enterprises take the lead in proposing and developing the
zones for profit, but they compete for subsidies and support from the
Chinese government. They propose the location, invest their own capital,
negotiate with the host government, and compete with other Chinese
companies for support through an open tender system. Once the zones
are developed, the enterprises will rent space and offer services to other
companies, replicating the model developed earlier in China’s overseas
Investment, Trade, and Development Promotion Centers. As with many

Chinese policy innovations, the zones are treated as an experiment, with
a variety of approaches encouraged. The results of the first two sets of
pilot projects (i.e., those projects approved during the two MOFCOM
tender calls; see next subsection, “The tender process in China’’) will be
examined for lessons learned before the effort is scaled up.
The Tender Process in China

After developing guidelines for the tendering process, China’s MOFCOM
asked its branch offices in the provinces and municipalities to promote
the idea and the guidelines among enterprises in their region, and help
them to apply. Two rounds of tenders were held, in 2006 and 2007, after
which the government paused to see the initial results of the pilot proj-
ects. Although MOFCOM was primarily concerned with the potential
for the projects to succeed as businesses, the Ministry of Foreign Affairs
also had to provide a political sign-off on the projects, as they were to
receive official government subsidies. There does not seem to have been
any specific strategy for locating the zones in particular countries and,
indeed, two separate proposals were funded for projects in Nigeria, one
of Africa’s largest markets. As a counter example, the Tanzanian govern-
ment was interested in having a zone, and political ties between Tanzania
and China are close, but no Chinese company was interested in propos-
ing a zone in Tanzania (Interview, Dar es Salaam, 2008; Interview,
Ministry of Commerce Official Beijing, China, 2009).
More than 60 companies submitted expressions of interest in the first
tender round held in 2006. About half of these companies were invited
to submit formal proposals, documenting the market potential and
investment environment, and providing written evidence of support from
the host country. Twelve companies were invited to Beijing as finalists to
appear before a panel of independent outside experts (officials from
Chinese special zones and university professors). Eight were selected,
with the major criteria being the proposal (including the market poten-
tial, investment environment, and support from the host government),
the financing capacity of the developer, and the developer’s proven
capacity to implement a major construction engineering project (Interview,
Ministry of Commerce, 2009).
Based on lessons from the first tender round, the government added
new requirements in the second round in 2007. The most important
requirement was a stipulation that companies proposing zones for
support needed to demonstrate an annual turnover of RMB 15 billion
(about US$2 billion) for at least the two previous years. This was an effort
to ensure that companies would have the resources to successfully
finance the development of the zones, with the Chinese government
playing only a supportive role. More than 50 companies applied in the
second round, 20 of which were invited to submit formal proposals, with
11 proposals finally selected. At least two of the losing proposals were
located in Africa, including the Guoji Industrial Zone in Sierra Leone, and
the Nigerian industrial estate proposed by Ningbo CSI (Zhongce) Power
and Machinery Group and Nigeria Lishi Group.
Chinese Government: Mechanisms of Support

In addition to the general going global policies in support of Chinese
overseas investment, MOFCOM assists companies with winning propos-
als in a number of ways. Winning companies receive RMB 200 to
300 million (US$29 to US$44 million) in grants and long-term loans of
up to RMB 2 billion (US$294 million). Subsidies can cover up to
30 percent of specific costs of zone development for preconstruction
(feasibility studies, visits for planning and negotiating, securing land, the
costs of preparing a bid) and actual implementation (the purchase or rent
of land, factory or office space, legal and notary fees, customs, and insur-
ance) through MOFCOM’s Trade and Economic Cooperation Zone
Development Fund. These costs can be retroactive to January 1, 2004, for
preconstruction and January 1, 2006, for implementation.
Chinese enterprises moving into the zones are eligible for a number
of incentives. First, they can be reimbursed for up to half of their mov-
ing expenses. They receive export and income tax rebates or reductions
on the materials sent for construction and get easier access to foreign
exchange in China’s strict capital control system. They also can apply to
a second MOFCOM fund, the Special Fund for Economic and
Technological Cooperation, to receive a rebate on up to 100 percent of
the interest paid on Chinese bank loans, a benefit good for five years.
In addition, the stamp of approval from the government is expected to
help Chinese policy banks (China Development Bank or China
Eximbank) or funds like CADF look more favorably on companies’
applications for low-cost finance or equity participation. For example,
China Development Bank established a dedicated Zambia team to pro-
vide funding support for the Zambia zone and NFC African Mining
activities in Zambia. Finally, Chinese embassies provide diplomatic sup-
port in negotiations with the host government over land, tax incentives,
or work permits.
Some provinces and municipalities have provided additional funds for

these overseas zones.8 For example, Jiangsu province and Suzhou munic-
ipality have awarded the Ethiopian Eastern Zone more than RMB
100 million (US$14.6 million). In the Egypt zone, the government of
Tianjin has promised to provide a subsidy of 5 percent of the actual
investment amount, pay the utility costs (rent, gas, water, and electricity)
for service enterprises in the zone, and provide full foreign investment
insurance and overseas personal accident insurance for three years. The
Tianjin government has given RMB 10,000 (US$1,470) for every Chinese
employee in the zone as a food subsidy in the first year.
SEZs, industrial parks, and science and technology zones in China usu-
ally are managed by special authorities, which often are subsidiaries of
provincial or local governments. Some of these authorities have estab-
lished investment companies to explore opportunities overseas. At least
three of these companies are among the firms and consortia involved in
the winning bids for the zones in Africa. These include TEDA, the largest
multi-industry, economic-technology development area in China, which
is involved in Egypt’s Suez zone; Nanjing Jiangning Development Zone,
one of China’s first national-level high-tech development zones, which
is a minority partner in the Chinese consortium leading the development
of the Lekki project in Nigeria; and Zhangjiagang Free Trade Zone, a
satellite city and EPZ in Suzhou municipality, which is a technical advisor
to the Eastern Zone in Ethiopia.
Strategy and Financial Commitments: Local Partners,

Other Investors, and Incentives
The overseas economic zones have a variety of models with regard to
local partners; level of financial commitments; managerial, development,
and marketing roles; and openness to non-Chinese companies (local
African companies and other FDI). The Chinese companies developing
these zones include national and provincial SOEs, and also include some
private firms (minying). The majority of the companies winning bids
already were operating businesses in the respective countries for some
time, at least a decade, in many instances. Ethiopia and Nigeria-Ogun are
exceptions, and, in Algeria, Jiangling had been involved only in exports
of its vehicles but had developed relationships with a network of
agents.
The first overseas zone established under the new MOFCOM program
was in Pakistan. A large Chinese appliance company, Haier, had earlier
constructed an industrial park near Lahore with a Pakistani company,
84
Table 4.1 Structure of Investment in China-Africa SEZs

Zone (country) Model Details/Comments
Jiangling (Algeria) 100% Chinese • Jiangling Automobile
• Zhongding International (construction)
Suez (Egypt) JV (75%+ Chinese) • Tianjin TEDA (45%)
• CADF (30%)
• ECCI, formed in May 1998 by TEDA, Egyptian banks and other interests, and the
Suez Canal Authority (20%)
• Tianjin Suez International Cooperation Co. (5%)1
Eastern (Ethiopia) 100% Chinese • Qiyuan Group (steel)
• Jianglian and Yangyang Asset Management
JinFei (Mauritius) 100% Chinese • Three partners: Taiyuan Iron and Steel Company (50%); Shanxi Coking Coal Group
(30%); Tianli Group (20%)
• CADF recently announced it would become an equity partner
Lekki (Nigeria) JV (60% Chinese; 40% local) us- • Chinese partners: CCECC-Beiya consortium (four partners); in 2009 CADF joined as
ing special purpose vehicle: an equity partner
Lekki Free Zone Development • Nigerian partners: Lagos state (20%): Lekki Worldwide Investments Limited (20%);
Co. Ltd.2 Note that Lekki Worldwide Investments Limited is an investment company also
owned largely by the Lagos state
• Lagos state received its shares in return for provision of land and 50-year franchise
to operate the zone; it is expected to contribute US$67 million to construction costs
• The Chinese consortium is to invest US$200 million
• Negotiations with communities affected by the project resulted in an agreement
to transfer 5 percent of the shares of the Nigerian consortium (i.e., 2% of total
project shares) to local communities, making them a stakeholder in the success of
the project3
Ogun (Nigeria) JV (82% Chinese; 18% local) • Chinese consortium based in Guangdong
• Nigerian share owned by state government—provided land and 100-year conces-
sion in return for shares4
Chambishi (Zambia) JV (95%+ Chinese) • CNMC (95%) has provided all the capital
• NFC African Mining PLC (15%) is a JV between CNMC (85%) and Zambia Consoli-
dated Copper Mines Ltd., a Zambian government-owned holding company (15%)
Source: Authors’ research.
Note: CADF = China-Africa Development Fund; CCECC = China Civil Engineering Construction Corp.; CNMC = China Nonferrous Mining Co.; Egypt-China Corporation for Invest-
ment = ECCI; JV = joint venture; TEDA = Tianjin Economic-Technological Development Area.
1. Interview, Vice Director of Suez TEDA Zone, Suez City, Egypt, June 9, 2009.
2. CCECC-Beiya (Beyond) was an entity formed by four Chinese companies: China Railway Construction Corp. with 35 percent share, Nanjing Beyond Investment Ltd. with 35 per-
cent, Nanjing Jiangning Economic and Technical Development Co. with 15 percent, and CCECC with 15 percent. In 2009, when the CADF joined the project, the ratios in the
consortium shifted to China Railway Construction Corporation Limited (35 percent), CADF (20 percent), CCECC (15 percent), Nanjing Jiangning Economic and Technological
Development Corporation (15 percent), and Nanjing North Asia Investment Co., Ltd. (15 percent, “Beyond/Beiya” consortium). Forty percent of Lekki Worldwide Investments is
owned by LSDPC, the Lagos State Government Development Corporation, and 40 percent is owned by Ibile Holdings, the investment company of Lagos State. The proportions
were confirmed in a telephone interview with the Lekki Chinese Consortium Office (2009).
3. Interview, Lekki Worldwide Investments, Lagos, December 14 and 16, 2009.
4. Mthembu-Salter (2009), 22.
85
Panapak Electronics, the distributor of Panasonic electronic products. In

2006, Haier proposed to establish the China Pakistan Enterprise Zone, an
overseas trade and economic cooperation zone, and along with Ruba
General Trading Company, became the first overseas economic zone to
be launched. The Haier-Ruba zone ran into problems with the acquisition
of land, however. According to some sources, Haier-Ruba insisted that
land for the project be provided without cost, or with heavy subsidies,
while the local government resisted this demand. In Africa, the partner-
ships and policies for the zones vary. Some are 100 percent Chinese
owned, and others are African-Chinese joint ventures, usually with host
governments as minority partners. In fact, the African private sector has
no investment in these zones.
The Chinese government initiated the concept of overseas zones and
established a framework for support for Chinese companies on an exper-
imental basis. MOFCOM has had a role in negotiating double-taxation
treaties and general investment protection treaties with host govern-
ments, but several of the zones have been established in countries in
which there is no double-taxation agreement (e.g., Ethiopia and Zambia)
or no investment protection agreement (e.g., Algeria, Mauritius, Nigeria,
and Zambia). MOFCOM has stepped in to help Chinese companies in
their negotiations, particularly when by stepping in, they were able to
assure host governments that companies did have Chinese government
support in their plans. From all accounts, however, the Chinese govern-
ment has taken a hands-off attitude toward African policies on these
zones. The Chinese government does not impose conditionality on host
governments in return for investment in these zones, which is in keeping
with long-standing Chinese policies that regard conditionality as interfer-
ence in the internal affairs of another government. Chinese companies
take the lead in negotiations with host governments over particular
incentives.
Incentive structures for the Chinese invested zones appear to take no
standard form and are dependent on individual negotiations and existing
laws in each country. In most cases, the negotiation does not appear to be
around tax and other fiscal incentives, but more around land values and
pricing (Interview, Lekki Worldwide Investments, December 14, 2009),
and the host partner’s commitment to infrastructure provision. For the
most part, the projects are governed by existing SEZ legislation in the
host country and thus conform to the standard set of incentives offered
through these regimes. One exception is Mauritius, where special incen-
tives were negotiated to attract the Tianli investment, but at the request
of Tianli, the agreement remains a secret (this is a bone of contention in

democratic Mauritius). Several incentives have come to light: the
Mauritian government agreed to supply land at a favorable rent, with a
99-year lease; investors meeting certain requirements could obtain
Mauritian passports, whereas usually the policy is to allow only for per-
manent residence; investors apparently were allowed licenses to carry out
banking and lottery businesses; and, although Mauritius has long used
laborers from China (and elsewhere in Asia), the Jinfei Zone apparently
has been given flexible permission to employ a high percentage of
Chinese workers.
Development and Management: Division of Responsibilities

In China, most zones have infrastructure provided by various branches of
the Chinese government. In some cases, such as the Qingdao Zone, for-
eign donors (Japan Overseas Economic Cooperation Fund) provided
development assistance loans for some of the infrastructure (port, high-
way, and water supply) in the zone areas. In Africa, most of the develop-
ment responsibilities inside the zones are carried out by the Chinese
developers, with African governments responsible for providing infra-
structure outside the zones, but there are exceptions (see below). In all
cases, the master plans and development strategies for the zones are pro-
vided by the Chinese partner. The Tianli Group hired a Shanghai firm to
work on the concept for the zone in Mauritius; CCECC-Beiya hired
Shenzhen Institute of Planning and Design (Shenzhen Guihua Sheji
Yuan) to plan the Lekki Zone in Nigeria; and, in Zambia, CNMC brought
in the China Association of Development Zones. Consortium partner
Jiangning also held an evaluation meeting in China, bringing in experts
and consultants from Nanjing University, Southeast University, and
Nanjing Planning and Design Institute to advise and comment on the
security, transportation, layout, and other aspects of the initial zone
design.
Construction responsibilities usually are shared between the Chinese
and African partners, with the Chinese consortiums handling the on-site
infrastructure. In Mauritius, for example, Tianli was expected to contrib-
ute US$3.3 million for external infrastructure, while the government of
Mauritius invested US$16 million to enlarge a reservoir and extend water
lines to the JinFei Zone, and US$5.6 million to build a new link road and
bring wastewater, electricity, and telecoms to the project site.9 In Nigeria’s
Lekki project, the joint venture consortium is responsible for building a
gas-fired power plant, water, and wastewater treatment plants, as well as
communication switching stations. The Lagos state government is respon-

sible for off-site access roads. In Zambia, however, the government
announced in 2010 that it had budgeted US$4.2 million for its share of
infrastructure required for the Lusaka subzone.10
In terms of operations and management, Chinese companies tend to
handle the day-to-day management, but administration takes place in
several layers. For example, Egypt has an informal joint China-Egypt
Task Force for the Suez Economic Zone addressing high-level problems;
an Egyptian SEZ Authority for the zone, which operates under the
prime minister and which has its own board of directors; a licensed
joint-venture Main Development Company (MDC) with authority to
develop the zone; and a development company (Egypt TEDA) that
executes what has been licensed to the MDC (Government of Egypt
2002, 2). Ethiopia also has a layered structure, with (1) a bilateral coor-
dination committee between the Chinese and Ethiopian governments;
(2) the Ethiopian management and service agency of the industrial
park, which will regulate the zone; and (3) the 100 percent Chinese-
owned Eastern Industrial Park Ltd. Co., which will invest in and operate
the park.
The Chinese developers often market the zone to Chinese companies
(although their websites usually are bilingual English and Chinese).
Their African counterparts, particularly state investment agencies, mar-
ket it to local firms and other international firms. For example, in
Nigeria, Lekki Worldwide Investments Ltd. has a website and is actively
marketing the LFTZ, and the Chinese consortium has a separate website
and has held a number of marketing events in China. In Mauritius, mar-
keting is managed jointly by the Mauritius Board of Investment and
Tianli. The most comprehensive approach can be found in Egypt.
Tianjin municipality formed a leadership panel for the Egyptian Suez
Economic and Trade Cooperation Zone. Coordinated by this panel, the
Tianjin municipal State-owned Assets Supervision and Administration
Commission promotes SOEs to invest in the zone, the Science and
Technology Committee encourages technology enterprises, and the
Agriculture Committee and the Construction Committee promote
investment by agricultural enterprises and construction materials firms.
TEDA also has formed the China-Egypt Commercial Association in
Suez, organizing market information seminars, participation in large-
scale trade fairs, and so on. TEDA has produced promotional materials
both in Chinese and in Chinese and English. At the same time, Egypt’s
government agency, GAFI, does some marketing of the zone through its
general promotional materials for investment in Egypt, and the General

Authority for the Economic Zone North-West Gulf of Suez also markets
the SEZ.
Chinese Enterprises and Chinese Labor

The Chinese developers appear to be open to investment from other
foreign firms as well as local firms, although most are aiming for a major-
ity of Chinese investors. In most cases, the expectation (from both par-
ties) is clear that the Chinese partners will bring in a substantial Chinese
investment. MOFCOM insists that because of the subsidies coming from
China, the subsidized cooperation zones primarily must serve Chinese
enterprises. Although no explicit limit is stated, MOFCOM hopes that
Chinese companies can make up 70 to 80 percent of the enterprises in
the cooperation zones. In some zones, however, they also have set specific,
non-Chinese foreign investment targets.
• Nigeria (Ogun): The six companies that have started construction in

Ogun, and indeed all of the 36 companies that have registered to invest,
are from China (specifically, Guangdong). Initially, the plan was to have
a mix of half SOEs and half private companies; this target was later
reduced to 30 percent SOEs. In reality, all the existing companies that
have begun construction are private companies.
• Zambia: Zambia’s MFEZ regulations, which apply to the Chambishi
Zone, require a minimum investment of US$500,000 to be able to take
advantage of government incentives, but Chambishi does not prohibit
Zambian firms or other foreign investors. Zone developers aim to have
40 Chinese companies and at least 10 from other countries by 2011,
and they have developed bilingual promotional materials. According to
Felix Mutati, Zambian minister of commerce, trade and industry, the
Zambian government initially wished for the zone to be solely Chinese,
but the Chinese wanted the zone to remain open to other investors.
That said, at present, only Chinese investors have committed to open
factories in the zone.
• Mauritius: Local investors are not allowed in the zone, at least in the
first phase. This requirement, the only one of its type among the Chi-
nese zones, was set by the Mauritian government, not the Chinese.11
Non-Chinese foreign investors are specifically welcome, however.
Finally, responding to concerns about Chinese incentives being limited to

Chinese companies, the Chinese government announced in November
2009 that it would establish two new programs. First, as part of the
Action Plan for 2010–2012, the Chinese would assist African SMEs to
invest in the zones. Second, a fund of US$1 billion will be set up for
African SMEs. It is not yet clear how they will be carried out.
The zones vary with regard to the regime for Chinese labor during
construction and operating phases. Most of the zones for which informa-
tion exists state that local laws on the use of expatriate labor apply. Because
only two of the zones have begun to operate (Egypt and Zambia), it is
not possible to determine the degree to which this is actually the case. In
these two zones, the workforce of the companies operating in the zones
is primarily local; however, it does appear that a relatively large percent-
age of Chinese are employed during the construction and start-up phases
in most of the projects. In Egypt, there is a clear national regime for for-
eign labor: one foreign employee is allowed for every nine Egyptians
employed. The first stage of the TEDA zone has more than 1,800 local
workers and (an informal estimate) about 80 Chinese staff, putting the
share of Chinese workers at below 5 percent. The general contractor for
the zone is an Egyptian company and some of the construction work was
subcontracted to local Egyptian companies. In Zambia’s MFEZ, approxi-
mately 400 Chinese and 500 Zambians were employed during the early
phase of construction, machinery installation, and training, putting the
Chinese share of employment at 45 percent. At present, with the instal-
lation and commissioning of specialized machinery at many of the facto-
ries, the percentage of Chinese employees is in flux. In the Chambishi
Zone as a whole (including the mines), in late 2009, there were approxi-
mately 700 Chinese and 3,300 Zambians (Haglund 2009). CNMC’s
already commissioned factories have an average of two Chinese to every
eight Zambians (25 percent Chinese workforce).
Information on the use of local and Chinese labor in other zones is
patchy and is available only for the construction phase. According to
Chinese sources, the first phase of construction of the Lekki Zone ini-
tially employed more than 50 engineers from China and 100 Nigerian
workers. Chinese partners state that the project currently has a ratio of
20 Chinese to 80 Nigerians.12 Nigerian officials confirm that informal
agreements have increased the number of Nigerians employed, particu-
larly from the project-affected community.13 In Mauritius, the construc-
tion phase of JinFei began only in September 2009, so it is early to assess
the situation. Overall, Mauritius has the most open approach to Chinese
workers among the six countries. During the first phase of construction,
60–65 percent of the workers reportedly have been Chinese (Minister
of Finance cited in “Zone Économique JinFei: Ce Que Vous Devez

Savoir” 2009, 8). The zone was at first expected to use 8,000 Chinese
contract workers at full development, while creating 5,000 local jobs
(and another 2,500 indirect jobs). Later revisions of the plan predicted
the creation of 34,000 jobs, with “more than half” expected to be local,
although the actual expected numbers have been much debated in the
media. Foreign workers have long been a staple of the island’s manufac-
turing and construction industries. Concerns have been raised in
Mauritius, however, about the sheer number of Chinese expected as a
result of this project.
Progress, Challenges, and Potential

The Experience to Date and Key Challenges
China’s initiative to develop SEZs in Sub-Saharan Africa is still in its early
stages. Of the five zones, only the Chambishi Zone in Zambia is operat-
ing—the SEZs in Nigeria (LFTZ and Ogun Guangdong Free Trade Zone)
and Mauritius are in relatively advanced stages of construction, and the
Eastern Zone in Ethiopia began construction in 2010. To date, some high-
level knowledge sharing and training of local managers has taken place,
but local employment, supply chain linkages, and technology transfer
remain limited. The most advanced zone (Chambishi in Zambia) had, as
of November 2009, attracted 11 companies and US$760 million in
investment, with five additional companies expected in 2010. The zone
employs about 4,000 workers (80 percent of whom are local). However,
most of the 11 companies invested to date are subsidiaries of the CNMC
developer and were present in 2006. Moreover, of the 4,000 workers
employed, only 600 are in the zone, with the majority working in the
mines or at other CNMC subsidiaries.14
All the zones have attracted interest from a number of (mainly
Chinese) enterprises. Chinese companies, especially those new to Africa,
appreciate the “feels-like-home” environment, convenient services, infor-
mation network, and proven credibility. The expectation is that enter-
prises within a value chain will cluster together in a planned zone and
increase their competitiveness. Furthermore, these zones are widely pub-
licized and promoted in China. Embassies and provincial governments
recommend the zones to companies planning to invest in Africa. Tax
incentives and facilities are an extra bonus.
Yet, despite many expressions of interest, most of the zones have been
slow to fill up with companies. It is still early in a process that may take
10 years or more, but several factors may explain the slow start. One is
the global economic crisis and, perhaps more broadly, challenges of
obtaining financing. The developers of the zones in Ethiopia and Mauritius
encountered serious problems at home, which were related to the finan-
cial crisis. These problems required substantial modification of their plans.
Both developers, however, have begun construction. Likewise, the main
company developing the Ogun Zone, Xinguang International, has run
into financial constraints at home, slowing progress on the zone.
The (in)experience of some of the developers has been a contributing
cause of uneven progress. The Zambia Chambishi Zone already had a
copper mine, copper smelters, sulfuric acid plant, and foundry before
2006. In Egypt, TEDA has been developing an experimental zone for
nearly 10 years and knew the market and environment. For both, the
inclusion into the MOFCOM program simply facilitated their expansion.
On the contrary, developers for the Ethiopia and Algeria zones had no
experience investing in those countries, and their plans were possibly less
realistic. In Ethiopia at least, tested by the economic crisis, revised plans
now account for such factors as the exchange rate, the need to plan for
foreign exchange shortages, and, relatedly, risk diversification. Whereas
the zone initially was going to focus in part on construction materials and
the production of steel, the developers may add nonferrous metal mining
to generate foreign exchange and diversify risks.
Another problem in some zones has been the failure to deliver a
world-class investment environment. For example, in Egypt during the
first years of the TEDA participation, a gap existed between the promised
services, facilities, and other benefits and the reality of what was offered.
Over time, the Egyptian government was able to fulfill most of its prom-
ises, but enterprises, understandably, do not want their investments to rest
on promises. Egypt still has not been able to ensure a permanent supply
of adequate water to the Suez Zone, for example. The greater Lekki pen-
insula is slated to get a new airport and port, the latter of which is critical
to the competitive offering of the LFTZ, but progress has been slow.
Finally, several zones are located at some distance from a large city.
Enterprises in the zones sometimes find it difficult to employ qualified
workers and arrange their daily commute. Chinese promotional activities
so far mainly target Chinese companies, often companies in their own
province, which limits the sources of possible investment and can hamper
the benefits clustering provides for the transfer of technology between
firms (local personnel still can be a vehicle for transfer, however, if hired
at a high enough skill level, which is another challenge).
Although it is premature to draw any conclusions, it is clear that while

some positive progress is evident, its pace is slow, and the challenges that
have arisen suggest that success is by no means guaranteed. Indeed, these
projects not only face many of the typical difficulties that afflict large
infrastructure projects, particularly in Africa, but additional issues of
cross-cultural communication, governance, political factors, and power
relations (see box 4.2 for an example of the challenges faced in one
project).
Box 4.2
Challenges in the Lekki Free Zone in Nigeria

Nigeria’s Lekki Free Trade Zone (LFTZ) is perhaps illustrative of some of the chal-
lenges facing both sets of partners in executing the joint venture SEZs in Africa.
The project has been under planning since 2003. Although it has made significant
progress, the development path of the project has faced many obstacles along
the way. Among them are the following:
• Financing constraints and partnership disputes: Construction was delayed for a

period because of financial constraints on the part of the Chinese consor-
tium; this was apparently linked to a dispute over partnership terms within
the Chinese consortium and a subsequent restructuring of the consortium.
• Miscommunications over terms of partnership: Nigerian partners expected the
Chinese consortium to deliver their share of investment in capital, whereas the
Chinese partners expected to deliver it in-kind through infrastructure develop-
ment. In addition, there have been concerns from the Chinese partners on
infrastructure responsibilities of the Nigerian partners (e.g., access to the gas for
the power plant). Chinese partners have raised concerns over the Nigerian
partners’ potential to ensure that the enabling policies critical to the success of
the zone actually will be implemented by the Nigerian federal authorities.
• Local community disputes: Local communities around the project protested
over resettlement terms, the construction of utilities lines through their com-
munities, as well as the employment of Chinese workers for construction. This
caused project delays and resulted in transferring 5 percent of the shares of
the Nigerian partner to the local community. In addition, negotiations resulted
in increasing employment opportunities for workers from local communities.
Source: Authors.
On the basis of their experience at home, Chinese developers expect

host governments to support zone development actively; instead, they
are finding in some projects (e.g., Ethiopia) that governments allocate
land to developers and do little else. Developers have been frustrated by
the lack of progress or poor quality of infrastructure provided by some
local governments outside the zones. In addition, many of the projects
have faced difficulties related to land acquisition and compensation.
Although these issues normally have been the responsibility of host
governments, they have contributed to project delays and friction with
the local communities (e.g., Lekki). Finally, although the political situa-
tion in the countries hosting zones generally is stable, abrupt policy
changes and conspicuous gaps between de jure policy and de facto
implementation has been problematic. Chinese companies have found
that promises of services like “one-stop shops” fail to materialize (e.g., in
Ethiopia). Even when express registration of investments has been set
up, obtaining licenses and work permits has caused delays (e.g., Nigeria,
Zambia).
African governments and civil societies have raised concerns on a num-
ber of levels. One of the biggest issues relates to lack of transparency and
poor communication. Although governments are privy to the contracts
signed for these zones, in most cases, they have not been published. This
not only is problematic for civil society but also contributes to misunder-
standings among the partners (see box 4.1). Some of these problems
relate to language—for example, at one of the zones, African officials
reported that relations improved when their Chinese partners brought in
a couple of high-level officials who were fluent in English. Some
African officials also worry that Chinese companies may use the zones to
bring in Chinese goods for reexport with African labels into areas where
African exports receive special incentives, as well as to enter local markets
without paying duties, as occurred in Sierra Leone. The use of Chinese
rather than local materials and labor has been a concern in certain proj-
ects (e.g., Mauritius). Chinese nationals tend to take most of the manage-
ment and technical positions, at least in the initial project stages. For
unskilled jobs, concerns about wages and working conditions have been
raised, although at this early stage of development most of these concerns
are still theoretical. Finally, there are concerns that the zones will become
Chinese enclaves, unconnected with the rest of the domestic economy.
Although all the zones are open to any foreign and (with the exception
of the Mauritius Zone) domestic investors and no explicit preferential
treatment is given to Chinese investors, the reality to date in most of the
zones is that investor interest has come primarily from Chinese companies.
Thus, in the absence of proactive efforts to promote integration, Chinese
enclave zones are a real risk.
Despite these risks and the challenges experienced to date, these zones
have the potential to deliver benefits to both parties. Benefits for African
economies should include those associated with foreign investment more
generally: employment, transfer of more advanced technologies, spin-offs
to local firms and foreign exchange earnings from exports. The more
African firms invest in the zones, the greater the opportunity for technol-
ogy transfers and spin-offs, although technical skills also can be taught on
the job to African employees of Chinese firms. Furthermore, the zones
should contribute to the government revenue, at least moderately. For
Chinese enterprises, benefits include the reduction in transport costs
from being closer to African or European markets, lower labor costs in
some cases, cluster economies, as well as the discussed incentives. Chinese
zone developers expect to profit from the increased value of the land,
fees, and rents. Some (Lekki, Mauritius) have planned extensive residen-
tial, commercial, and entertainment areas, making the zones multiuse.
Maximizing Benefits
The partnership to develop SEZs is part of a long-term process of strate-
gic engagement between China and Africa. It offers a significant oppor-
tunity to contribute to job creation, industrialization, and poverty
reduction in the region. To fulfill this potential, however, the projects
must be successful from a business, social, and environmental perspec-
tive. This will require a partnership framework that includes the follow-
ing elements:
• High-level commitment and active engagement from host governments: As

noted, China learned many aspects of SEZ management through build-
ing zones with overseas partners. These lessons were widely applied
throughout China’s SEZs and have become common practice. African
governments have been less strategic at managing the projects as learn-
ing experiences. Few participate actively in the management of the
projects or have set up specific programs aimed at developing SEZ
expertise over the long term. Assigning specific individuals, preferably
Mandarin-speaking, to work with Chinese development teams can
help, as can high-level participation on boards.
• Ensuring the provision of quality off-site infrastructure: Worldwide, getting
zones off the ground has proven difficult in part because of
infrastructure inadequacies (power, roads, water, sanitation). PPPs or

other models, such as independent power producers, are options that
can accelerate this development, bringing employment and other
benefits online earlier. Involving the local private sector, in addition to
Chinese investors, will be critical.
• Communicating and enforcing standards: Local job creation, environ-
mental sustainability, and labor standards all depend on African govern-
ments enforcing existing standards and regulations. It may help to have
these translated into Mandarin, as Mozambique has done for labor
regulations.
• Implementing programs to promote domestic market linkages: African
countries will not profit from the dynamic benefits of SEZs without
ensuring closer links between the (mostly Chinese) foreign investors in
the zones and the domestic private sector. Supplier development pro-
grams and initiatives to facilitate local companies to set up inside the
zones can play an important role in creating these linkages. The re-
cently announced funding from the Chinese government to support
African SMEs and plans to assist these SMEs to invest in the zones
could provide a foundation to improve linkages.
• Transparency and community relations: When contracts and agreements
for these important zones are not made public, suspicion can fester. For
the zones to be sustainable, they need to have buy-in from local com-
munities who understand the nature of the agreements. The agreement
in the Lekki project for example, where 5 percent of the shares of the
Nigerian consortium were transferred to local communities, may
be one way of addressing some of these concerns.
Appendix 4.A. China’s Official Overseas Economic and Trade

Cooperation Zones
Country Zone
2006 Tender
1. Pakistan Haier-Ruba Home Appliance Industrial Zone
2. Zambia Chambishi Nonferrous Metal Mining Group Industrial Park
3. Thailand Luoyong Industrial Zone
4. Cambodia Taihu International Economic Cooperation Zone, Sihanouk
Harbour
5. Nigeria Guangdong Ogun Economic and Trade Cooperation Zone
6. Mauritius Tianli (now JinFei) Economic and Trade Cooperation Zone

Country Zone
7. Russian Federation St. Peterburg Baltic Economic and Trade Cooperation Zone
8. Russian Federation Ussuriysk Economic and Trade Cooperation Zone
2007 Tender
9. Republica Bolivariana Lacua Tech and Industrial
de Venezuela Trade Zone
10. Nigeria Lekki Free Trade Zone
11. Vietnam Chinese (Shenzhen) Economic and Trade Cooperation Zone
12. Vietnam Longjiang Economic and Trade Cooperation Zone
13. Mexico Ningbo Geely Industrial Economic and Trade Cooperation
Zone
14. Ethiopia Eastern/Orient Industrial Park, Jiangsu Qiyaan Investment
Group
15. Arab Republic of Egypt Tianjin TEDA Suez Economic and Trade Cooperation Zone
16. Algeria Chinese Jiangling Economic and Trade Cooperation Zone
17. Republic of Korea Chinese Industrial Zone
18. Indonesia Chinese Guangxi Economic and Trade Cooperation Zone
19. Russian Federation Tomsk Siberia Industrial and Trade Cooperation Zone
Source: Brautigam 2009, 315–16.
Notes
1. Some of this information has been published in Deborah Brautigam, The
Dragon’s Gift (Oxford University Press, 2009).
2. China introduced a new tax regime in 2008 that essentially did away with the
tax holidays that previously were offered in the SEZs and harmonized the tax
structures between SEZ and domestic firms. This new regime is in compliance
with the WTO.
3. As China prepared to join the WTO, policy makers sought ways to assist
Chinese firms to face the increased competition and inevitable restructuring
that trade liberalization would bring. Helping mature “sunset” industries to
move offshore, where they could be closer to their markets or raw materials,
would reduce costs and increase competitiveness. For example, Chinese com-
panies with high energy consumption and high labor intensity are especially
encouraged to invest in the Egypt zone (see Suez.TJCOC.gov.cn (2008)).
4. “Jiangxi Province plans to invest RMB 3.8 billion in Algeria” (2008).
5. The difference between the 19 zones chosen by tender, and the public goal of
10, allows for a comfortable margin. The Chinese government would prefer
to overshoot its goals, rather than come up short. In Africa, for example, the
official goal was announced in November 2006 as “three to five” zones by
2009. Seven actually were approved, and six were announced as under way
in November 2009 at the FOCAC meeting in Egypt.
6. “Aerjiliya Xincuoshi jiang dui Woqiye Chukou he Touzi Chansheng Yingxiang”

(2009).
7. This is discussed further in Brautigam (2009).
8. “Dongfang Gongyeyuan, Kaipi Feizhou Taojinlu” (2008); “Suyishi Jingwai
Jingmao Hezuoqu 10 yue Jiepai” (2008).
9. “JinFei Project—Infrastructure Works, Terms and Conditions of Agreement”
(2009).
10. “Government allocates K 20 billion for Lusaka South Multi Facility Economic
Zone” (2009).
11. The government wanted the special incentives for the zone to be used to
attract additional new investors from overseas, and not investors already pres-
ent in Mauritius (Interview, Minister of Finance, 2008).
12. Interview, Lekki Zone Representative (2009); “Weida de Kaituo – Laiji
Zimaoqu Jianshe Jishi” (2008).
13. Nigerians reported that they had asked the Chinese to send some of their
construction workforce of about 200 back to China and hire Nigerians. One
researcher reported that an agreement negotiated between the two sides calls
for at least 40 percent of the workforce to be Nigerian. However, Nigerian
officials we spoke with denied that this was the case (Mthembu-Salter 2009,
3; interview, Lekki Worldwide Investment officials, December 14, 2009 and
December 16, 2009).
14. The mining activities and the CNMC subsidiaries are not technically
considered part of the zone.
References
“Aerjiliya Xincuoshi jiang dui Woqiye Chukou he Touzi Chansheng Yingxiang”
[Algeria New Measures in Trade and Investment Will Affect Export and
Investment of Chinese Enterprises]. 2009, March 17. Commercial Office of
Chinese Embassy in Algeria. Available at http://dz.mofcom.gov.cn/aarticle/
jmxw/200903/20090306105852.html (accessed November 3, 2009).
Brautigam, Deborah. 2009. The Dragon’s Gift: The Real Story of China in Africa.
Oxford: Oxford University Press.
CCECC-Beyond. 2008. Gongsi Xinwen [Corporation News]. Available at http://
www.cceccbeyond.com.cn/news-show.asp?ID=279 (accessed December 14,
2009).
“Dongfang Gongyeyuan, Kaipi Feizhou Taojinlu” [Oriental Industrial Park, Paving
Gold Path in Africa]. 2008, February 25. Zhangjianggang Daily. Available at
http://www.zjgxw.cn/html/tebieguanzhu/20080225/63110.html (accessed
December 14, 2009).
Foreign Trade Information and Survey Newsletter. 2009. Suzhou Municipality

Foreign Trade Administration, no. 38 (July 21).
“Government Allocates K 20 Billion for Lusaka South Multi Facility Economic
Zone.” 2009. Lusaka Times, October 10.
Government of Egypt. 2002. “Law of Economic Zones of a Special Nature.”
Available at http://suez.tjcoc.gov.cn/news_display.asp?id=106&iid=%BA%CF
%D7%F7%C7%F8%B6%AF%CC%AC (accessed December 14, 2009).
Haglund, Dan. 2009. E-mail communication, December 10. Bath, UK: University
of Bath.
“Jiangxi Nizai Aerjiliya jianli Hezuoqu” [Jiangxi Plans to Establish Cooperation
Zone in Algeria]. 2007, September 4. International Online. Available at http://
gb.cri.cn/14714/2007/09/04/2925@1745553.htm (accessed November 3,
2009).
“Jiangxi Province Plans to Invest RMB 3.8 billion in Algeria.” 2008. China
Knowledge, May 5.
“JinFei Project—Infrastructure Works, Terms & Conditions of Agreement.” 2009.
Republic of Mauritius, Parliamentary Debates No. 25, October 20.
Mthembu-Salter, Gregory. 2009. “Elephants, Ants and Superpowers: Nigeria’s
Relations with China.” South Africa Institute of International Affairs, China
in Africa Project, Occasional Paper No. 42.
Mthembu-Salter, Gregory. 2009. “Chinese Investment in African Free Trade
Zones: Nigeria.” South Africa Institute of International Affairs, China in Africa
Project, Policy Briefing No. 10.
NBFET.gov.cn. 2009. Laiji Ziyou Maoyiqu-Zhongni Jingmao Hezuoqu Jianjie
[Lekki Free Trade Zone – profile of Sino-Nigeria Economic Cooperation
Zone]. Available at http://www.nbfet.gov.cn/index.php/default/view/
id/14385/sub/1 (accessed November 12, 2009).
Soriwei, Fidelis. 2008. “How Imo Lost Free Trade Zone to Ogun,” January 7.
Available at http://www.stocknewsline.com/regions/africa/how-imo-lost-
free-trade-zone-to-ogun/ (accessed December 13, 2009).
Suez.TJCOC.gov.cn. 2008. Hezuoqu Dongtai [Latest Activities of the
Economic Cooperation Zone]. Available at http://suez.tjcoc.gov.cn/news_
display.asp?id=54&iid=%BA%CF%D7%F7%C7%F8%B6%AF%CC%AC
(accessed December 14, 2009).
“Suyishi Jingwai Jingmao Hezuoqu 10 yue Jiepai” [Suez Overseas Econ & Trade
Cooperation Zone Opening in October]. 2008, February 23. Jingji Cankao
Daily. Available at http://invest.people.com.cn/GB/75571/105500/8852019
.html (accessed December 14, 2009).
“Weida de Kaituo – Laiji Zimaoqu Jianshe Jishi” [Great Exploration – Reporting
the construction of Lekki Free Trade Zone]. 2008, September 12. Lekki Free
Trade Zone. Available at http://lekki.jndz.gov.cn/Lekki_News_Show_55

.html, 2008.9.12 (accessed December 14, 2009).
“Zone Économique JinFei: Ce Que Vous Devez Savoir.” 2009. L’Express Dimanche,
September 20, p. 8.
Interviews
Interview, Beijing Representative of CCECC-Beiya, Beijing, China, November 27,
2009.
Interview, Dar es Salaam, January 2008.
Interview, Lekki Chinese Consortium Office, Beijing, December 14, 2009.
Interview, Lekki Zone Representative, Beijing, November 27, 2009.
Interview, Lekki Worldwide Investments, Lagos, December 14 and 16, 2009.
Interview, Lekki Worldwide Investments, Lagos, Nigeria, December 14, 2009.
Interview, Lekki Worldwide Investment Officials, Lagos, Nigeria, December 14
and 16, 2009.
Interview, Ministry of Commerce Officials, Beijing, China, November 25, 2009.
Interview, Minister of Finance, Port Louis, Mauritius, July 2008.
Interviews, Oriental Industrial Park Management, Addis Ababa, Ethiopia, June 15,
2009.
Interview, Vice Director of the Suez Teda Zone, Suez City, Egypt, June 9, 2009.
CHAPTER 5
Partnership Arrangements
in the China-Singapore (Suzhou)
Industrial Park: Lessons for Joint
Economic Zone Development
Min Zhao and Thomas Farole
Background
SEZs were established in China in the early 1980s as “demonstration
areas” to test policy reforms aimed at economic liberalization and to
attract foreign investment. SEZs have had a transformational effect in
building a competitive manufacturing sector in China and catalyzing its
economic development. They have played a significant role as a labora-
tory for economic reforms in the country and have been a major source
of technological learning to enable upgrading by local firms. During the
development of the SEZ program, the Chinese government made an
explicit effort to partner with foreign entities to learn about setting up
and managing modern industrial parks. One example of this approach
was the China-Singapore Suzhou Industrial Park, a modern industrial
township developed in the early 1990s. Although it faced many difficul-
ties in its early years, it has emerged as a major success, attracting US$17
billion in FDI and supporting more than 500,000 jobs.
101
Governments throughout the world, particularly in developing coun-

tries, are keen to develop SEZ programs to support diversification, attract
investment, create employment, and benefit from skills and technology
transfer. Many of these governments are turning to foreign partners,
including China, Malaysia, and Singapore, that can bring not only invest-
ment but also substantial expertise and experience in establishing and
running SEZs. China’s own experience in making use of foreign expertise
through joint venture partnerships suggests that this approach may offer
significant potential for developing-country governments not only to
attract investment and international-standard infrastructure, but also, and
perhaps most important, to learn about how to plan, develop, and man-
age large economic zone projects.
This chapter highlights the case example of China-Singapore Suzhou
Industrial Park (SIP) as a lesson for how governments and SEZ investors
in developing countries can maximize the benefits of partnership arrange-
ments in their zone programs.
Introduction to Suzhou Industrial Park

SIP is a “new township” located in East Suzhou, a major industrial city
approximately 80 kilometers from the commercial center and port facili-
ties at Shanghai. Launched in 1994, SIP now hosts six functioning areas:
• Jinji Lake-Rim Central Business District (CBD)

• DuShu Lake Innovation District of Science and Technology (11 square
kilometers)
• Eastern High-Tech Industrial Area
• Integrated Free Trade Zone (5.28 square kilometers)
• SIP Ecological Science Hub (4 square kilometers)
• Yangcheng Lake Tourism Resort
Of the six functioning areas, Jinji Lake-Rim CBD, Eastern High-Tech

Industrial Area, and the Integrated Free Trade Zone are located in the
80-square-kilometer (8,000-hectare) China-Singapore cooperative zone,
which covers just over one-fourth of SIP’s total land area. SIP Ecological
Science Hub is outside of the core zone, but it was developed by the joint
venture development company China-Singapore Suzhou Industrial Park
Development Co., Ltd. (CSSD) in 2007.
By the end of June 2008, SIP had attracted around 3,300 foreign enter-
prises, including 82 Fortune 500 MNCs with a cumulative contractual
China-Singapore (Suzhou) Industrial Park: Lessons for Joint Economic Zone 103
foreign investment of US$34 billion, and domestic companies with total

contractual investment of RMB 130 billion (US$19 billion). In 2008,
exports from the zone grew to more than US$30 billion. There has been
rapid clustering of industries in information and communications tech-
nologies (ICT), thin-film transistor and liquid crystal display screens, and
automotive and aeronautical parts, and recently, the zone has shown rapid
emergence of high-end sectors, including software, outsourcing services,
and pharmaceuticals.
SIP has become a major driving force of the Suzhou economy, achiev-
ing an annual average economic growth of 30 percent since its launch
(see table 5.1). With around only 4 percent of the total land and popula-
tion, and 7 percent of the industrial electricity, SIP contributes about
15 percent of Suzhou’s GDP and 30 percent of its trade. By the end of
2008, SIP accommodated 600,000 residents and supported more than
500,000 jobs. More notable, SIP has built a reputation as one of the most
business-friendly, residential-friendly, and environment-friendly industrial
parks in China. SIP ranks the second best in terms of investment climate
among 57 national-level industrial parks in China, according to the
Ministry of Commerce. It ranks highest in infrastructure, human resources,
and social responsibility, and it ranks second in economic strength, envi-
ronment protection, and technology innovation (China Economic
Development Zone Association 2008).
The success of SIP has built considerable mind share among the
Chinese officials and a “Singapore” brand name that Singapore companies
can leverage, especially in the area of township development and urban
Table 5.1 SIP Key Statistics

Foreign companies 3,300
Investment: US$34 billion (25%)
– Foreign (Share of Suzhou FDI) RMB 130 billion (US$19 billion)
– Domestic
Employment (end 2008) 500,000
Exports (GDP) (2008) US$ 31 billion
– Share of Suzhou Exports ~30% (share of total trade)
Output (GDP) (2008) RMB 100 billion (US$14.6 billion)
– Share of Suzhou GDP 15%
Average annual growth (1994–2008) 30%
Taxes generated (2008) RMB 9.5 billion (US$1.4 billion)
– Share of Suzhou revenue 15%
Source: Suzhou Industrial Park.
Note: GDP = gross domestic product; FDI = foreign direct investment.
For more detailed annual statistics, see appendix 5.A.
solutions throughout China. It also brought a good financial return to its

investors. Although the project incurred significant losses in its initial
years, CSSD reached cumulative profitability in 2003 and has been prof-
itable every year since. Reported profits in 2007 were RMB 360 million
(US$52.7 million). For an overview of key milestones in SIP’s develop-
ment from 1994 through 2009, see appendix 5.B.
The Strategy of the Chinese and Singaporean Governments

The SIP was launched on February 26, 1994, when Chinese Vice Premier
Li Lanqing and Singapore Senior Minister Lee Kuan Yew signed the
Agreement on the Joint Development of Suzhou Industrial Park in Beijing.
On the same day, both parties also signed the General Agreement on
Suzhou Industrial Park, which laid a foundation for the establishment of
the CSSD. From the outset, SIP was viewed a flagship project in eco-
nomic cooperation between China and Singapore and commanded high-
level political attention. Indeed, SIP played an important strategic role
both for the Chinese and the Singaporean governments.
For China, SIP was established against the context of the transition
from a planned, closed, mainly agricultural economy to a global, indus-
trial, market economy. Following Deng Xiaoping’s now famous southern
tour in 1992, the 14th National Congress of the Communist Party
adopted the goal of establishing a socialist market economy and accelerat-
ing the pace of opening up. Faced with the task of learning how to man-
age in a market economy, senior leaders were inspired by the economic
miracle achieved by Singapore in the 30 years after its independence. As
Deng Xiaoping laid out in 1992, “Singapore enjoys good social order and
is well managed. We should tap on their experience, and learn how to
manage better than them” (Deng 2004). That year, more than 400
Chinese officials visited Singapore to study how the country achieved
progressive economic success while maintaining social order. Because
China already was experimenting with large-scale industrial zones,
Singapore’s successful experience in developing such zones was of great
interest.
For Singapore, SIP offered opportunities on both economic and politi-
cal grounds. At the same time China launched its first stages of market-
oriented reform, Singapore was moving to a new phase of its development.
With the economy expanding, finding space for new industries became a
significant challenge. At the beginning of the 1990s, the government of
Singapore launched the Regional Industrial Parks Initiative, one of several
thrusts within its broad “regionalization strategy.” The aim of the initiative
was “to generate an external stream of revenue that would supplement
Singapore’s domestic economy” (Pereira 2007; Perry and Yeoh 2000). SIP
was an important vehicle to demonstrate that the Singapore model of
industrial parks could be transferrable (Inkepen and Pien 2006), thus
opening up a potential new industry for the country, delinked from the
physical constraints of its small market. Politically, SIP provided Singapore
with the opportunity to better understand an emerging China, and to
deepen relations with the country, through the various platforms set up
for interaction between both leaders and officials. To achieve these aims,
Singapore was particularly keen to work not just on a project with China
but in China. For this, SIP fit the bill perfectly. The project allowed
Singapore to share its development lessons comprehensively, including
how to plan, implement, and administer an entire integrated develop-
ment with industrial, housing, commercial, and recreational components
in “the Singapore way.” Although Singapore invested in other industrial
parks in the region, the economic and political importance of China gave
this project a high profile and strong government involvement.
Jointly, a key objective of SIP was that Singapore would share its
knowledge of efficient economic management and public administration
experience with its Chinese partner so that the latter could formulate
pro-business policies in SIP and could govern with transparency and effi-
ciency. With a benign business environment and good infrastructure, SIP
was expected to be competitive in attracting investment and generating
positive return to developers. But beyond this, both Singapore and
China’s leaders had a larger vision for SIP to be a model of reform and
innovation for other parts of China.
Partnership Structure
SIP was established with a multilevel governance structure, as illustrated
in figure 5.1. Overall governance of SIP is the responsibility of the China-
Singapore Joint Steering Council (JSC). The JSC was designed to meet
relatively infrequently (every 12–18 months) to review the progress,
resolve major implementation issues, and set future development goals.
The JSC is cochaired by the Chinese vice premier and the Singapore
deputy prime minister and includes ministerial chiefs of the two coun-
tries, senior officials of Jiangsu provincial and Suzhou municipal govern-
ments, and the head of Jurong Town Corporation (JTC). At a more
operational level, the Joint Working Committee, which was more active
Figure 5.1 Governance Structure of SIP
China Joint Steering Council Singapore

Vice Premier (JSC) Deputy Prime
Minister
Joint Working Committee Permanent Secretary

Suzhou Mayor
(JWC) (Trade & Industry)
Adapting
Singapore Software
SIPAC
Experience Office Project Office
Main Developer:
China-Singapore Suzhou Industrial Park
Development Group Co. Ltd (CSSD)
Sources: http://www.cssd.com.cn/chinese/yqjj.shtml, 2009.

Note: SIPAC = Suzhou Industrial Park Administrative Committee.
during the start-up phase of the SIP, is cochaired by the mayor of Suzhou
and Singapore Ministry of Trade and Industry permanent secretary.
The Suzhou Industrial Park Administrative Committee (SIPAC) was
empowered by the Suzhou municipal government as an independent
local government authority to oversee SIP, which covers a total jurisdic-
tion of 288 square kilometers (of which 80 square kilometers belongs to
the China-Singapore cooperative zone1). The remaining area belongs to
three counties—Loufeng, Weiting, and Shengpu.2 SIPAC was granted
high autonomy in policy making and law enforcement. Currently, SIPAC
is also primary land developer of SIP.3
CSSD was initially the main land developer and still is a major real
estate developer and industrial property agent of SIP. CSSD is a joint
venture between China Suzhou Industrial Park Co., Ltd. (the Chinese
consortium) and Singapore-Suzhou Township Development Co., Ltd.
(the Singaporean consortium). The Chinese consortium is made up of
several large Chinese SOEs at national, provincial, and municipal levels.
The Singaporean consortium was composed of 24 companies, of which
10 are government-linked companies and statutory boards with total
share of about 42 percent of the Singaporean consortium (Straits Times,
January 15, 1998). From 1994 through 2000, CSSD was controlled
65 percent by the Singaporean consortium and 35 percent by the Chinese
consortium. But based on an agreement made in 1999, the equity stake

of the two consortia was flipped on January 1, 2001. Along with this,
corporate control and management responsibility also shifted from the
Singaporean side to the Chinese side. As of August 2005, CSSD attracted
three more minority shareholders, which took a 20 percent share, diluting
the Chinese and Singaporean consortia to 52 percent and 28 percent,
respectively. The current structure of CSSD is shown in figure 5.2.
Currently, CSSD has formed the four core businesses, namely, primary
land development, real estate development, public utilities, and multiser-
vices. The primary land development is represented by the development
of SIP Ecological Science Hub. The real estate development includes the
industrial properties developed by CSSD headquarter and the residential
properties developed by CS-SIP Land Corporate. The public utilities
mainly refer to the water, power, and gas operated by CS-SIP Public
Utilities Development Group Corporate. And the multiservices mainly
include investment promotion, infrastructure development, international
education and property management, and so on.
The Knowledge-Sharing Process

Singapore not only provided initial capital for zone development and
designed a high-standard land-use plan, but also played a critical role in
facilitating improved governance and, perhaps most important, in trans-
ferring wide-ranging technical knowledge of industrial-city planning and
management. In all of this, the government of Singapore played a critical
lead role.
First, Singapore provided substantial initial investment capital, risk
sharing, and investment promotion, in particular, in the early phase of
development. In addition to its equity share in CSSD, Singapore govern-
ment-linked companies also have stakes in other joint venture companies
in SIP: total investments by statutory boards and government-linked
companies to SIP came to more than US$120 million by the end of 1997
(Straits Times, January 15, 1998).4
To attract MNCs to locate their high value added operations in SIP, the
Singapore Economic Development Board (EDB), the lead government
agency to attract foreign investment, was brought in to share their knowl-
edge with SIP officials on investment promotion in the initial stage of SIP
implementation. EDB’s overseas centers also assisted with SIP’s invest-
ment promotion initiatives in the start-up years and even introduced to
CSSP some investors who intended to invest in Singapore. At a time
108
Figure 5.2 Current Ownership Structure of CSSD
Shareholders Affiliates
China-Singapore Suzhou Industrial

Park Land Co., Ltd.
China Industrial Park Co., Ltd. CS SIP Public Utilities Development

(Chinese Consortium) 52% Group Co., Ltd.
Singapore-Suzhou Township Development China-Singapore Suzhou Industrial Park

Pte Ltd (Singapore Consortium) 28% International Education Service Co., Ltd.
The Hong Kong and China Gas Co., Ltd. Suzhou Singapore International School
CSSD
10%
Suzhou Industrial Park Power
Generation Co., Ltd.
CPG Corporation Pte Ltd. – 5%
China-Singapore Suzhou Industrial
Suzhou New District Hi-Tech Industrial Park Venture Co., Ltd.
Co., Ltd. – 5%
China-Singapore Suzhou Industrial Park
(SuQian) Development Co., Ltd.
China-Singapore Su-Tong Science & Technology

Industrial Park (Nantong) Development Co., Ltd.
Singapore Branch
Nantong Branch
Source: http://www.cssd.com.cn/chinese/yqjj.shtml, 2009.

Note: CSSD = China-Singapore Suzhou Industrial Park Development Co., Ltd.
when foreign investors were skeptical about China’s business environ-

ment, the partnership with Singapore provided foreign investors with
confidence to invest in SIP.
The most important contribution of the partnership arrangement in
SIP has been in the area of knowledge transfer. Indeed, a formal knowl-
edge transfer scheme and institutional structure was built into the part-
nership agreement. The Chinese side established an Adapting Singapore
Experience Office under the SIPAC, and the Singapore side set up a
counterpart—the Software Project Office (SPO)5 affiliated with the JTC.
These two agencies meet quarterly in SIP to review the software transfer
program. In the early years when SIP was putting in place the basic infra-
structure, software transfer focused on such topics as Township
Development, Urban Planning, and Public Works Management. With SIP
moving into higher value added industries in recent years, such as high-
tech manufacturing, R&D, and modern services, software transfer has
kept pace with these changes to include such topics as the following:
• Eco-Friendly Industrial Park Development

• Science and Technology Development
• Talent Management
• Development of the Business Process Outsourcing (BPO) Industry
Since SIP’s inception, more than 2,000 Chinese officials have attended
training conducted by the Singapore SPO.
To ensure the effectiveness of the knowledge transfer, officials that
attended training were required to report what they had learned.
Additionally, they drafted laws and regulations by adapting Singapore
practice to local conditions. So far, more than 100 regulations have been
enacted by adapting Singapore practice. Meanwhile, knowledge transfer
was reinforced through staff exchange. SIPAC sent staff to their
Singaporean counterpart and Singapore also sent staff to SIPAC and
CSSD to work for short-term periods. The rotation period was often
three months. These rotations helped SIPAC and Suzhou municipality to
build up public management capacity, as SIP strived to become a service-
oriented, transparent government providing full-day, complete process,
and all-round services to investors and residents.
In the process of SIP development, the Chinese side also learned by
doing. One example that received great recognition was urban planning.
Right before the construction of SIP and with the strong emphasis of
Singaporean side, experts from both China and Singapore drafted a
sophisticated urban plan, which Chinese officials marked as far-sighted.

The plan included not only a general framework and detailed master plan,
laying out land by industry, trade, living, and other town functions, but
also set up more than 300 professional plans. This plan helped to build a
philosophy among Chinese officials of (1) planning before construction
and (2) constructing underground works before works above ground.
Meanwhile, the partnership arrangement also strengthened governance,
including a law enforcement management system.
SIP has strictly followed the plan over the 15 years since it was drafted.
At the time, this was rare. Such a philosophy now has been widely
expanded among industrial parks in China. Many new industrial parks
invited Singaporean companies to design their land plans. SIP has become
a model of change and innovation for other parts of China. It is estimated
that more than 20,000 officials from all over China make learning visits
to SIP each year. Singapore also has been asked by various Chinese cities
and provinces to share their experiences, given the attention generated by
SIP’s success. CSSD is now beginning to leverage its expertise within
China; it recently began the development of a 10-square-kilometer indus-
trial park project in Suqian, in northern Jiangsu Province. CSSD also
ventured to neighboring Nantong to develop a 40-square-kilometer
Suzhou-Nantong High-Tech Park in a joint venture with the Nantong
government.
Challenges to the Partnership

Although the partnership arrangement brought many benefits to the
project, it also brought difficulties that might not exist, or at least would
be less complex, in a typical government-run project. Having the majority
stake in the initial project stages was critical to enable the Singaporean
consortium to drive the project forward, but it also created its own set of
problems, in particular, the misaligned incentives of some of the key
Chinese stakeholders. The Singaporean partners focused on using SIP as
a platform to transfer developmental experience, and so put emphasis on
knowledge transfer and urban planning. They intended to build SIP infra-
structure to international standards, which implied high development
costs. By the end of 2000, infrastructure investment in the 9 square kilo-
meters developed at SIP totaled RMB 7.8 billion (US$1.14 billion),
whereas in the other four state-level development zones in Suzhou, 50
square kilometers were developed with an investment of only RMB 6.9
billion (US$1.01 billion) (Suzhou Statistical Yearbook, various years)—
that is, infrastructure investment in SIP was six times more intensive
(expensive) than in the other parts of the zone. As a result, the land was
expected to be sold or rented at a rate high enough to recover this devel-
opment cost.
For local government, which had only a minor share of the project, the
incentives were quite different. They cared less about commercial returns
and more about the social and economic returns, including job creation,
GDP, and perhaps most important, tax revenue. In China, local govern-
ment is responsible for the provision of most public goods and services,
and its main source of revenue is the value added tax paid by industrial
firms. Thus, the incentive for local government is to attract as many
industrial investors as possible, as quickly as possible. Land rents and
prices that are too high to attract industrial investors result in less tax
revenue and fewer jobs. Thus, there was a clear misalignment of incen-
tives between the Singaporean majority stakeholders and the local gov-
ernment. This misalignment was exacerbated by the fact that the central
government made a commitment in the initial project agreement to
allow SIP to keep all tax revenues generated in the zone. Thus, local gov-
ernment had no incentive to invest in the critical connecting infrastruc-
ture to SIP.
Perhaps the biggest source of difficulty in the partnership was the
fierce competition that arose in neighboring industrial parks. Before the
launch of SIP in 1994, Suzhou Administration already had four state-
level economic development zones—Suzhou New and Hi-Tech
Development Zone (located west of the old Suzhou city),6 Kunshan
Economic and Technological Development Zone (just 30 kilometers
away from SIP), Zhangjiagang Bonded Area, and Suzhou Taihu National
Tourism and Vacation Zone, as well as numerous provincial-level zones.
Except for the latter of these, all the zones targeted industrial investors.
As the other industrial parks were all government sponsored, land
developers in those industrial parks usually were SOEs. Their interests
naturally were aligned much more closely with local governments.
Attracting investors, rather than short- or medium-term commercial
returns, was tops on their agenda. Industrial land therefore was rented
to industrial investors at a subsidized rate, creating serious competition
for SIP and making it almost impossible to maintain rents at levels that
could deliver a commercial return.
Moreover, free-riding could hardly be avoided. As SIP is an open area,
roads built inside or connecting to SIP also could be used outside of SIP,
including in adjacent industrial zones. At the time SIP was attracting
interested investors with the help of Singapore’s promotion, other indus-

trial parks and neighborhood villages and towns were watching and learn-
ing from SIP, recruiting staff who received on-the-job training in SIP, and
even lobbying investors who initially were attracted by SIP. Competition
with the Suzhou New and High-Tech Development Zone drew the most
attention and criticism from Singapore partners in late 1990s.
Despite excellent infrastructure and governance, SIP had little com-
petitive advantage relative to other industrial parks in Suzhou during
its initial years, partly because its world-class approach may have been
too far ahead of the market at the time. Heavy infrastructure invest-
ment, misaligned incentives, and the decline in FDI resulting from the
Asian financial crisis in the late 1990s resulted in huge losses for CSSD
in the early years. From 1994 to 2001, the total cumulative losses for
CSSD totaled US$77 million. By 1999 (the fifth anniversary of SIP),
with the foundation of SIP firmly laid and the knowledge transfer
process in an advanced stage, the Singapore consortium reviewed its
position and decided to relinquish majority shareholding to the Chinese
partners in 2001 to better align the incentives and encourage the local
officials to focus on the long-term development of SIP. Management
responsibility for CSSD was also transferred to a Chinese partner as of
January 1, 2001.
Since the time of the shift in ownership control, SIP has emerged as a
major success. However, interviews with Chinese officials from SIPAC
attribute the change in fortunes at SIP after 2000 mainly to the change
in the macroeconomic context rather than anything related to the man-
agement or ownership structure of the project. From around 2000, China
experienced a wave of industrial relocation of MNCs; in addition, the
Chinese ecotnomy recovered from Asian financial crisis. Both trends were
accelerated further with China’s accession to WTO. Indeed, from 2000 to
2007, FDI to China grew much more rapidly than in from 1995 to 2000
(see table 5.2). SIP attracted FDI at more than double the national rate,
but this was from a small base. Similarly, exports also boomed during this
period: China’s nationwide exports increased 3.9 times, while Suzhou’s
Table 5.2 FDI Utilized, US$ Billion

1995 2000 2007 CAGR ‘95–00 CAGR ‘00–07
SIP 0.41 0.52 1.76 4.9% 19.0%
Suzhou 2.32 2.88 7.16 4.4% 13.9%
China 37.5 40.7 74.7 1.7% 9.1%
Source: SIP Statistical Office, 2009; Suzhou Statistical Bureau, 1995–2008; and authors’ calculations.
exports increased 10.3 times and SIP’s exports increased by 17.9 times,
although again from a low base (China Statistical Bureau 2008; SIP
Statistical Office 2009; Suzhou Statistical Bureau various years).
Overcoming Partnership Challenges and

Implementing Innovations
It is perhaps unsurprising that the early implementation of SIP encoun-
tered significant teething problems. An ambitious project such as SIP
required a considerable shift in mind-set and an alignment of expecta-
tions and objectives of all major stakeholders. Despite similarity in lan-
guage and culture, Singapore and China have two different administrative
systems and corporate cultures. The key to SIP success was the funda-
mental resolution by both governments to make SIP a win-win project,
and their willingness to evolve the business model to address operational
problems, without compromising the emphasis on the softer aspects of
developmental planning and a pro-business environment.
Over the past 15 years, partnership arrangements evolved to overcome
or mitigate difficulties. The key change was to align the interests of all
stakeholders. Tax revenues (VAT) generated from SIP, which were
allowed to be kept in SIP at the inception, are now shared between cen-
tral government, Jiangsu provincial government, Suzhou municipal gov-
ernment, and SIPAC: the central government gets 75 percent, Jiangsu
provincial government gets 12.5 percent, Suzhou municipal government
gets 10 percent, and SIPAC keeps only 2.5 percent. The main tax revenue
source for SIPAC is corporate and personal income tax, 60 percent of
which is retained; SIPAC also is allowed to keep all revenues from land
sales. Original residents of cooperative areas (farmers) were relocated to
the other towns in SIP, but are under the governance and support of
SIPAC. These original residents are compensated by SIPAC with resi-
dences and monthly allowances. Suzhou New and High-Tech Development
Zone, a major competitor of SIP, took 5 percent of the CSSD stake in
2005. Thus, all stakeholders are now able to benefit in one way or another
from the development of SIP. Meanwhile, the role of SIPAC has been
strengthened and the head of SIPAC was granted the rank of vice mayor.
The head of each department in SIPAC now enjoys rank of director, the
same level as their counterparts in Suzhou municipal government.
As a result of the realigned incentives, SIPAC has emerged as a de facto
main land developer. An Investment Promotion Office was established,
and SIPAC has put substantial resources into attracting both domestic
and foreign investors. Industrial land and factories were rented at a com-
petitive market rate, while commercial and residential land was auc-
tioned. Revenues from land sales were used to finance infrastructure
investment. Several state-owned corporations under the supervision of
SIPAC were established following the model of Temasek—some join
CSSD in land development and some manage state-owned properties.
The participation of these SOEs accelerated the pace of SIP develop-
ment. Although CSSD still plays an active role in the industrial land
development, it also has expanded its business areas to residential and
commercial estate development, property management, and the provi-
sion of other services.
The success of the partnership also can be attributed to the high-level
leadership attention accorded to the project by China and Singapore. The
Singapore government invested substantial resources into making the
project a success. In addition to committing many of its best officials to
spearhead the project,7 many Singapore government ministries and agen-
cies in charge of such areas as urban planning, water treatment, commu-
nity infrastructure, and social security actively provided knowledge
transfer to SIP officials, a commitment that continues into 2011.
The strong support from China’s central government extends to the
many policy incentives granted to SIP, which further sharpened SIP’s
competitive edge. SIP was awarded the same status as China’s five SEZs
and Shanghai’s Pudong New District at its inception in 1994. In addition
to the preferential policies enjoyed by the SEZs and Pudong, SIP also
enjoyed many other privileges of its own as a unique Singapore-China
cooperation project. For example, at the project’s inception in 1994, the
corporate tax in SIP was reduced to 15 percent from the usual 30 percent
for most parts of China. The local authority, SIPAC, also was authorized
to approve investments of any size with no upper limit on the total
amount of investment in SIP.8 Adopting Singapore’s experience of the
Central Provident Fund system, SIP developed the SIP Provident Fund
System (SPF), the only such regional scheme in China and perhaps the
most important preferential incentive offered at SIP. Based on prepay-
ment accumulation and personal account deposit, the system covers
social security items, such as pension, medical care insurance, unemploy-
ment insurance, employment injury insurance, maternity insurance, and a
housing fund. The contributions from enterprises or individuals to SPF all
go to a personal account and can be moved when employees leave SIP. In
contrast, the contribution from enterprises to pension funds is put into a
pool and is not portable when employees move to other provinces or
cities. This SPF model lowers the cost to employers by up to 60 percent

of wage costs for a typical low-skilled worker versus the cost to provide
the same income, including pension, in a personal account. Thus, it helps
enterprises not only to lower labor costs but also to retain talent.
In addition to preferential tax policies, the government has supported
the zone by streamlining regulatory and approval procedures for firms
operating in the zone. With the support of the central government, SIP
made many innovations in public administration by adapting the
Singaporean experience. In January 1995, 19 departments, including the
Special Economic Zones Office of the State Council, set up on-site
offices in SIP to facilitate licensing, regulatory, and operating administra-
tion for SIP-based firms. Since 2002, this one-stop service center has been
empowered by SIPAC to operate as a fully authorized, independent gov-
ernment department since 2002.
Perhaps the most prominent feature of government support has been
the continued streamlining of customs procedures and port handling,
which have been adapted and upgraded to help SIP overcome its natural
disadvantage of being landlocked. From SIP’s inception in 1994, a
Customs Sub-Administration was planned; it was launched formally in
1999 (box 5.1 lists major milestones of its development). SIP now oper-
ates as a virtual port, and it is allowed to handle customs clearance of
exports and imports directly. Firms in SIP enjoy an efficient “green lane”
and independent customs supervision, which has run 24 hours a day,
seven days a week since 2003. An Integrated Free Trade Zone (IFTZ) was
founded in SIP in 2008, by integrating two processing trade zones, one
bonded logistic center and one customs checkpoint.9 The IFTZ now
serves as a platform to promote the development of the BPO industry in
SIP. Some multinational corporations, including Fairchild Semiconductor
Inc., Samsung, and Chi Mei Optoelectronics, already have established or
are planning to establish their distribution centers in the IFTZ. Thus, an
international logistics and distribution base is gradually taking shape.
Conclusion
As developing-country governments engage with China and other foreign
partners in large economic zone development projects, the experience of
China’s partnership with Singapore for SIP reveals a number of valuable
lessons. These are summarized in three main categories: (1) partnership
structure and governance; (2) planning, development, and operations;
and, possibly of most importance, (3) learning and knowledge sharing.
Box 5.1
SIP Free Trade Zone Development

1994 (August): An office was set up to make preparation for the establishment of
SIP Subadministration of Customs.
1995 (August): Custom’s Regulation on Supervision over Exports and Imports in

SIP was enacted.
1997: SIP Weiting Customs Supervision Station was founded and became one of
the first three express inland ports in China.
1998 (September): The second-class land port was opened in SIP.
1999 (May): SIP Subadministration of Customs was formally in operation.
2001 (January): SIP bonded zone for export processing (EPZ) was in operation.
Customs adopted an electronic customs declaration and supervision system to
manage enterprises in EPZ, where the Electronic Data Interchange system replaces
the use of the Processing Trade Logbook and Bank Deposit Account System.
Enterprises located in EPZ can enjoy additional preferential policies, including
duty exemption for construction materials, equipment, packing materials, con-
sumable materials, and a rational amount of office appliances. Other preferential
policies include exemption from value added tax on products produced in EPZ
and exemption from tariff quota and license control for cargos into and out of EPZ
to and from overseas (excluding restricted items), and a tax rebate on Chinese-
made raw materials, parts and components, packing materials, and construction
materials entering into EPZ.
2002: With the approval of State General Administration of Customs, the first
air-land transfer mode was introduced, making SIP a virtual airport. With the
Air-Land Transshipment Model, supervised warehouses of the Shanghai Airport
are extended directly to SIP, making import and export declaration possible at
the local customs—SIP Customs. This function realizes a one-stop service for
declaration, inspection, and dispatch, and it offers flexibility in the arrival, decla-
ration, inspection, and clearance of goods. The time required for getting through
customs procedures was greatly reduced from one to two days to seven to
eight hours, making it possible for local IT companies to control their produc-
tion cycle within five days.

Box 5.1 (continued)
2003: SIP Subadministration of Customs provides all-day services—24 hours a

day, seven days a week.
2004: SIP Bonded Logistics Center (Type B) with a total planned area of three
square kilometers was founded. The Type B Bonded Logistics Center has the func-
tions of a “free trade port.” All imported goods entering the logistics park enjoy
“bonded” status. Goods entering the logistics park from within China can be
regarded as an export and enjoy a tax rebate.
2007: With the operation of a new land-air transfer mode, the virtual airport
finally realized the two-way direct transportation. This made SIP a unique vir-
tual port in China combining ocean, air, and land shipment, and allowed SIP to
handle customs declaration, inspection, and clearance of exports and imports
directly.
2008 (January): The SIP IFTZ (China’s first) was in operation by integrating the exist-
ing two EPZs, the Customs Bonded Logistic Center and Weiting Customs Check-
point. Within the planned area of 5.28 square kilometers, the IFTZ has the functions
of bonded logistics, bonded processing, international trade, and port operation.
Incoming foreign goods are under duty bond, incoming domestic goods enjoy
export duty refund, and all transactions of goods within the area are exempted
from VAT levies. Customs set up a dedicated office in the zone.
Source: Authors.
Partnership Structure and Governance

• Ensuring active political commitment at the highest level: One key to suc-
cess was the strong resolution of both Chinese and Singaporean govern-
ments to make SIP a win-win success. Top-level political commitment
is demonstrated by the profile of the board of the project’s joint steer-
ing committee, which is cochaired by the Chinese vice premier and the
Singapore deputy prime minister and includes ministerial chiefs of
both countries. Singapore also has put senior ministers in charge of dif-
ferent aspects of the knowledge exchange program. This political com-
mitment helped to overcome many of the problems faced in the early
days of the partnership, ensuring that both parties had an active interest
in finding ways to make things work.
• Aligning incentives among key partners: The main challenges to the part-
nership arose in part because of the difficult balance of meeting both
commercial and political objectives. For these high-profile projects,
both objectives are critical. In the initial structure of the partnership
arrangement, however, incentives were not properly aligned to address
this balance. Although the flip in ownership and control of the project
was the high-profile part of the realignment of incentives, a number of
other important actions were taken to ensure that all stakeholders in-
volved had the incentive to work toward common goals.
• Establishing a strong institutional structure for project governance: The

partnership developed a strong, multitiered governance structure for
SIP, consisting of three elements: (1) a steering committee that func-
tions as a platform of policy dialogue, coordination of policies among
all government departments, and problem resolution when needed;
(2) an empowered local authority who performs the government
role and whose interest is closely aligned with the zone develop-
ment; and (3) a joint venture development entity, invested by both
parties so that both sides will share cost, risk, and return from zone
development.
• Planning for local phase-in: Although having the Singaporean partner

control the project at the outset was practical, as the Chinese partner
built its technical capacity, a phase-in of local management control was
practical, both politically and commercially.
• Recognizing the importance of flexibility: Given the long-term nature of

these projects, and the large sunk costs to get them started, it is criti-
cal that partners show a willingness to evolve the business model as
necessary. China and Singapore both proved to be highly practical in
their approach to resolving the significant early stage challenges of
the project.
• Building mutual respect and recognizing capabilities and constraints: On

the one hand, the host side should be flexible and ready to build a
business-friendly investment environment in an innovative and prag-
matic manner, and should provide the needed support to make zone
development sustainable and profitable. On the other hand, the inves-
tor should respect the constraints that the host government faces and
should take advantage of the local knowledge of its counterpart. SIP
suffered at first because of the failure of both parties to fully appreciate

this necessity.
Development and Operations

• Complementing physical development with policy reform to generate a
business-conducive environment: In the context of building economic
zones, streamlining customs procedures and reducing the time and
cost of documentation, transit, port handling, and customs procedures
would be of the highest priority. The more efficient government ser-
vices the host government provides and the better investment envi-
ronment, the fewer tax incentives are needed to make the zone
development sustainable. In this respect, SIP established a compre-
hensive one-stop service with a strong mandate (including devolved
decision-making authority). Efficient, on-site customs service was a
fundamental component of the zone offering. Officials not only estab-
lished a dedicated customs subadministration (and gave it a strong
mandate) but also continued to evolve and expand the services avail-
able, eventually leading to the establishment of an integrated free trade
zone within SIP. Finally, innovations in other aspects of administration
and regulations, most notably the SPF, created important sources of
competitive advantage for SIP.
• Shifting the mind-set from “hardware” to “software”: Although the Chi-

nese local partners largely were focused in the beginning on infra-
structure (as tangible evidence of “success”), the Singaporean partners
placed great emphasis on the importance of “software” or knowledge,
whose results were not immediate but were critical to the sustain-
ability of the project. Facilitating this shift in mind-set is a difficult
challenge, practically and politically, and is aided strongly by a robust
program of knowledge sharing.
Learning and Knowledge Sharing

• Ensuring a strong, two-way institutionalized commitment to learning:
Knowledge sharing was fundamental to the partnership from the
beginning. Critically, this was one of the main objectives of both the
host government and the investor. Moreover, it went well beyond plat-
itudes to clear, active commitment. On the Singaporean side, this was
evidenced by putting senior officials in charge of various parts of the
“software transfer” program over the years. On the Chinese side, the
government not only put many officials through the training programs,
but also required those officials to demonstrate their acquired knowl-
edge on the job.
• Making use of practical exchanges: Formal training also has been embed-
ded at SIP through a long-running program of staff exchanges between
the partners.
• Establishing a formal institutional structure to promote the learning

program: A formal program was put in place at the start, with both
partners setting up counterpart offices (China’s Adapting Singapore
Experience Office and Singapore’s SPO) designed to plan and oversee
the process of knowledge exchange.
• Taking a comprehensive approach to the curriculum, with an evolving

focus over time: The knowledge-sharing program designed for the part-
nership covered almost all important aspects of zone planning and
implementation, and public services delivery. Moreover, as the focus
of SIP evolved over time, so too did the training needs. And the cur-
riculum was adapted to meet these needs, bringing in new subjects,
such as environmentally friendly part development and BPO sector
development.
Appendix 5.A Selected Indicators: Developments at SIP, 1994–2008
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Employment 208,291 334,829 422,476 501,961
within Sino-Singapore
Cooperation Area 2,985 5,634 11,085 16,488 24,257 31,164 45,876 70,695 107,244 179,546 228,321 275,167
FDI utilized billion US$ 0.1 0.2 0.4 0.7 1.2 0.8 0.6 0.5 0.9 1.2 1.8 1.6 1.6 1.8 1.8
within Sino-Singapore 0.1 0.2 0.4 0.7 1.2 0.8 0.6 0.4 0.7 0.7 1.0 1.2 1.0 1.1
Cooperation Area
Investment million RMB 252 1,402 2,380 1,093 985 890 1,008 3,788 4,836 5,827 10,078 7,748 7,512 9,534
within Sino-Singapore
Cooperation Area 234 1,338 2,352 1,039 866 748 674 3,083 3,228 3,315 5,818 4,195 3,855 5,538
Fixed asset investment billion RMB 0.7 1.2 4.6 6.8 11.7 8.8 5.4 6.2 10.4 20.3 28.2 35.7 39.5 41.6
Industry 0.1 0.2 2.5 4.5 8.5 6.4 3.2 3.6 5.0 10.0 12.9 15.3 16.8 17.0
Infrastructure 0.5 0.5 1.7 1.4 2.3 1.3 1.2 1.5 3.2 5.7 5.8 5.9 7.7 5.3
Real estate — 0.4 0.3 0.6 0.4 0.5 0.6 0.8 1.8 2.8 6.2 10.0 11.0 12.5
Public utilities — — 0.1 0.2 0.4 0.4 0.2 0.2 0.4 1.6 2.8 3.7 3.7 6.5
Other 0.1 0.2 0.1 0.1 0.1 0.1 0.2 0.1 0.0 0.2 0.6 0.9 0.3 0.4
Gross domestic product billion RMB 1.1 1.4 2.0 3.3 5.0 7.4 13.0 18.0 25.2 36.5 50.3 58.1 68.0 83.6 100.2
Local budgetary revenue billion RMB 0.0 0.1 0.1 0.2 0.2 0.4 0.8 1.2 1.4 2.1 2.9 4.2 5.3 7.6 9.5
as percentage of GDP % 1.9 3.7 4.2 4.6 4.5 4.9 6.0 6.8 5.5 5.6 5.8 7.2 7.7 9.1
Local budgetary
expenditure billion RMB 0.0 0.0 0.1 0.2 0.2 0.4 0.8 1.1 1.4 1.9 2.5 4.3 4.8 5.7
as percentage of GDP % 2.5 3.5 3.8 4.8 4.9 5.3 5.8 6.0 5.5 5.3 5.0 7.5 7.1 6.9
Exports billion US$ — 0.0 0.1 0.2 0.3 0.6 1.5 1.7 2.6 6.0 11.9 19.2 25.0 28.5 31.1
Imports billion US$ — 0.0 0.3 0.5 1.1 0.9 2.0 2.1 3.2 8.4 16.3 21.3 25.0 28.4 31.4
Source: www.sipac.gov.cn 2009.
Note: FDI = foreign direct investment; GDP = gross domestic product; RMB = renminbi; — = no data.
121
Appendix 5.B SIP Timeline and Major Milestones
1994 On February 26, the representatives from the governments of China and
Singapore signed the Agreement on Joint Development of Suzhou Indus-
trial Park.
“Suzhou Industrial Park Development Co., Ltd.”, invested in by Suzhou

Industrial Park Co., Ltd. (Chinese Consortium) and Singapore-Suzhou
Township Development Pte. Ltd. (Singapore Consortium), was approved
to establish in mid-1994. The total amount of investment was US$100 mil-
lion. The registered capital was US$50 million, in which Singapore consor-
tium invested US$32.50 million that accounted for 65 percent and China
consortium invested US$17.50 million that accounted for 35 percent.
On September 2, Jiangsu Provincial Government issued a notification on

accelerating SIP construction, asking all government departments to put
SIP development at the top of their work agenda and give full support.
In November, the company changed its name to “China-Singapore Suzhou

Industrial Park Development Co., Ltd.”
October 12, an office was established to prepare for the establishment of

SIP Subadministration of Customs.
On November 18, the master land plan for phase 1 was approved.
1995 On January 5, 19 departments, including SEZs Office of State Council, set

up on-site offices in SIP.
On February 21, Suzhou Industrial Park Administration Commission

(SIPAC) was established.
On August 1, the Customs Regulation on Supervision over Exports and

Imports in SIP was enacted.
On December 27, SIP was granted preferential treatment of Special Eco-

nomic Zones in terms of import tariffs.
CSSD increased the total amount of investment from US$100 million to

US$150 million.

1996 CSSD company increased the total amount of investment to US$300 mil-
lion and increased the registered capital to US$100 million. The sharehold-
ing structure remained unchanged.
On October 12, the Steering Committee announced that the phase 1 of 8

square kilometers were to be completed by end of 1997.
1997 On March 16, Suzhou municipal government approved the Provision on

SIP Provident Funds Management.
1998 On September 1, the second-class land port was opened in SIP.
1999 On January 1, SIP Local Tax Administration was established.
On May 12, SIP Subadministration of Customs was formally in operation.
On June 28, China and Singapore signed a Memorandum of Understand-

ing on the Development of SIP. It states that Chinese and Singaporean
consortium would flip its stake on January 1, 2001. After the adjustment,
the major responsibility of management of CSSD would be transferred
from the Singaporean side to the Chinese side.
2000 On September 5, Suzhou municipal government called for mobilizing all

resources and pushing forward the development construction of SIP.
2001 In line with the spirit of the Memorandum of Understanding on the

Development of SIP reached on June 28, CSSD adjusted the investment
proportion of China and Singapore on January 1, 2001. The investment
proportion of Chinese consortium was adjusted from 35 percent to 65
percent, and that of the Singapore consortium was adjusted from 65 per-
cent to 35 percent. After the adjustment, the Chinese side took over the
major responsibility for management.
January 10, SIP bonded zone for export processing was in operation.
March 23, Suzhou municipal government launched the development of

phase 2 and phase 3 of SIP.
On October 28, the state-owned land-use right was auctioned for the
first time.

2002 CSSD completed the capital enlargement and injection in August 2005.
The registered capital was increased to US$125 million. Three new share-
holders were attracted: Hong Kong and China Gas Investment Ltd., CPG
Corporation Pte. Ltd., and Suzhou New District Hi-Tech Industrial Co., Ltd.
2003 On December 9, SIP Intelligent Property Right Protection Center was in

operation.
On March 31, SIP People’s Court and People’s Procuratorate were in

operation.
2007 In April, SIP became a pilot of National High and New Technology Zone.
In May, SIP became a demonstration zone for service outsourcing.
2008 On January 15, the SIP Integrated Free Trade Zone (the first one in China)
was in operation and customs set up an office in the zone.
On June 29, CSSD joint stock company founding meeting was held and
the joint stock company was established on June 30.
Source: Authors.
Notes
1. This is equivalent to more than one-tenth of the total land area of
Singapore.
2. The initial cooperation area was 70 square kilometers and there were five
townships at the outset of SIP. Later the cooperation area was expanded
to 80 square kilometers and the five townships were combined into three
townships.
3. The 80-square-kilometer Cooperative Zone was designed to met the standard
of “Nine Utilities and Leveled Land” (the nine utilities being Roads, Power
Supply, Water Supply, Gas Supply, Steam Supply, Sewage System, Storm
Water Drainage, Telecommunication, Cable Television), meaning it was fully
prepared and serviced, ready for development of operating infrastructure.
4. Xinsu Industrial Development was set up to develop and operate ready-built
factories in the park. These are Temasek Holdings (US$4.14 million), JTC
International (US$16.54 million), Keppel Land (US$10.33 million), and
Sembawang Industrial (US$10.33 million). Three companies have additional
stakes in Gasin (Suzhou) Property Development Co. Ltd., a company set up
to develop residential property in the SIP: Temasek Holdings (US$4.23
million), JTC International (US$4.23 million), and Keppel Land (US$5.29

million).
5. “Software” in this context refers to knowledge—the term is intended to con-
trast with the “hardware” of infrastructure, which is at the core of the com-
mercial partnership.
6. This site initially was offered to Singapore for development of SIP.
7. For instance, current Minister (Prime Minister’s Office) Lim Swee Say was
the first director of the Singapore SPO, and former Minister of State for Trade
and Industry Chan Soo Sen was the first chief executive officer of the joint
venture CSSD.
8. SIP’s approval limit subsequently was capped in a State Council decree issued
in 2002, but the approval limit has since increased.
9. After the success of the scheme in SIP, it has since been extended to 20 other
cities.
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CHAPTER 6
SEZs in the Context of Regional

Integration: Creating Synergies
for Trade and Investment
Naoko Koyama
Introduction
Paralleling the rapid development of SEZs in recent decades has been the
development of regional trade agreements (RTAs)1 to promote trade and
economic integration. As of February 2010, a total of 457 RTAs have been
notified to the WTO, out of which 266 are already in force. These num-
bers are expected to continue to rise.
SEZs and RTAs are policy tools that promote trade and investment of
countries and regions. When successful, SEZs generate significant local
employment, increase exports, and accelerate economic growth.
Meanwhile, successful RTAs contribute to increased trade among mem-
ber countries and promote regional integration more broadly. When the
two initiatives exist simultaneously, they have the potential to generate
significant synergies. Specifically, by lowering barriers to regional trade
and facilitating the potential for realizing scale economies in regional
production, RTAs stimulate investment by both domestic and foreign
firms. By providing serviced land, infrastructure, and an improved
127
regulatory environment, SEZs lower the cost and risk to firms in under-
taking such investments. In addition, the growth of intraregional trade
may create opportunities for specialized zones, for example, focusing on
logistics or cross-border trade.
Although SEZs have the potential to facilitate regional synergies, RTAs
often face challenges in incorporating SEZs into their regulatory frame-
works. This is particularly true in the case of traditional EPZs. This chal-
lenge stems from the fact that although RTAs represent bilateral or
multilateral instruments, SEZs are, in all cases to date, instruments by
which an individual country promotes investment and exports, the for-
mer potentially in competition with their RTA partners. In particular,
when SEZ programs provide enterprises with tariff-related incentives,
they trigger various issues in the context of RTAs. For example, they
may create an incentive for “tariff-jumping”—that is, when a foreign
firm decides to jump over the tariff wall to avoid trade costs (tariffs).
This tariff-jumping might happen through investment of a physical
presence in a member country (the traditional definition of tariff-
jumping), although in this case, the investment would be in an SEZ and
not necessarily within the member country’s customs territory. But it also
might happen without any physical presence at all, by using the SEZ as a
bulwark to enter the customs territory. Specifically, because many SEZs
allow duty-free entrance of inputs imported from outside of a territory,
foreign (extra-RTA) goods could potentially enter the RTA free of duty
through an SEZ, and then leak into the customs territory of other RTA
member states. If a newly established RTA disallows exports from a mem-
ber country’s SEZ to the territory of other RTA member countries, how-
ever, the operation of existing SEZ investors may be affected substantially.
Consequently, this may necessitate a reform of SEZ programs in member
countries to prevent a large loss of investment. Furthermore, excluding
SEZ investors from taking advantage of the RTA prevents member coun-
tries from realizing the full potential of these two trade and investment-
generating instruments and achieving effective regional integration. To
leverage fully both of these policy tools, RTA member countries need to
take a collaborative approach to harmonize their SEZ programs.
Despite the growing significance of both SEZs and RTAs, research on
the connection between these two instruments of trade and investment
has been limited. In practice, most RTAs take measures to prevent tariff-
jumping through SEZs. Yet, few efforts have been made to harmonize
SEZ programs across member countries in some RTAs. Such collabora-
tion could generate considerable benefits by creating synergy between
SEZs in the Context of Regional Integration 129
SEZ and RTA and by acting as a step toward greater economic integra-
tion. This chapter aims to fill part of the research gap. In particular, the
objectives of this chapter are (1) to discuss the implication of RTAs on
SEZs and review experiences in various RTAs, including country-specific
cases; and (2) to outline the potential opportunities that a harmonized
approach toward SEZ initiatives might generate.
In the above framework, this chapter first reviews briefly the role,
trend, and impact of RTAs, with particular attention to those of Sub-
Saharan Africa. Then, after laying out various types of issues arising from
overlap of RTAs and SEZs with preferential tariff treatment, it reviews
how RTAs have been managing these issues and draws lessons from case
examples. Finally, it discusses how harmonizing SEZ programs, including
but not limited to duty-free imports and fiscal incentives, within RTA
member countries can help realize synergies between the two policy
instruments and contribute to greater trade and investment generation
and deeper economic integration.
Regional Trade Agreements

Introduction to RTAs
RTAs promote the expansion of trade between or among member
countries by offering preferential access to certain products through the
reduction (but not necessarily elimination) of tariffs. Under the WTO
and General Agreement on Tariffs and Trade (GATT) principles of
MFN treatment, any arrangements to offer zero or low rates of tariffs
between two members would automatically require an extension of this
treatment to all WTO members. GATT article XXIV, however, allows
for a deviation from MFN principles, in the form of “regional trade
agreements” (WTO 2009).
RTAs offer both static and dynamic benefits to member countries. At
the firm level, by removing or reducing trade barriers, RTAs lower the
cost of exporting or (in the case of a free trade agreement) essentially
expand the size of the “domestic market.” They also provide export-
oriented producers with access to lower cost and possibly higher quality
inputs than might have been available in the domestic market (or through
imports from alternative sources). At the level of the wider economy,
RTAs facilitate industrial restructuring, resulting in higher scale, more
specialized, and competitive producers. The procompetitive effect of
reducing barriers to cross-border trade and investment results in the least
productive firms exiting the market, merging with or being acquired by
larger or more productive firms, and contributing in time to greater pro-

duction scale and lower costs, with competition ensuring that the savings
are passed on in the form of lower prices (Baldwin, forthcoming). From
the perspective of economic development, RTAs can facilitate industrial-
ization and specialization. In small markets (as is the case in many coun-
tries of Sub-Saharan Africa), the requirement for firms to cover their
fixed costs places strict limits on the degree of specialization that is pos-
sible. By expanding the scale of the accessible market, RTAs therefore
enable local firms to specialize while maintaining sufficient economies of
scale. Specialization then becomes another source of competitiveness—a
virtuous circle is created.
For firms, one of the most fundamental implications of RTAs is that
they turn regional export markets into “virtual” domestic markets.
Although this creates significant opportunities, for firms that are based
inside SEZs (particularly those inside traditional EPZs that combine
duty-free import and fiscal incentives with restrictions on sales to the
domestic market), it may also mean a loss of their privileged position in
selling to regional markets vis-à-vis firms based outside the zones.
Unlike SEZs, which have historically targeted foreign investors,2 RTAs
benefit businesses regardless of the source of capital. As discussed,
RTAs should facilitate the ability of local firms to exploit economies of
scale, specialize and become more sophisticated, and start exporting in
the regional market. It is this balance between foreign and local inves-
tors and exporters that creates the tension in the relationship between
SEZs and RTAs.
Trends in Development of RTAs

Although more countries join the WTO, the creation of RTAs also has
been increasing at an accelerating speed, as illustrated in figure 6.1. In
2009, the number of RTAs notified to the WTO reached its historical
record of 37 cases. As of February 2010, 457 cumulative cases have been
notified, of which 266 are in force. These include bilateral and multilat-
eral reciprocal preferential trade agreements, including free trade agree-
ments (FTAs), customs unions, partial scope agreements, and economic
integration agreements. Among these, FTAs account for the majority.
Should the Doha Round ever reach successful completion, it should
be expected to curtail the need for RTAs. Yet, many analysts predict that
the number of RTAs will continue to grow, at least in the short term.
One reason is that some agreements already are signed or under nego-
tiation and will come in effect soon. But it can also be attributed to the
Figure 6.1 Total Notifications Received by Year, 1948–2009
40
transparency 37
mechanism 35
35
WTO 31
30 29
26
25
22 22
21
20 19 19
18
17
16
15
15 14 14
10 9
8
7 7
6 6 6
5
5 4 4
3 3 3 3
2 2 2 2 2 2 2 2
1 1 1 1 1 1 1 1 1 1 1
0
49
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
Source: WTO Secretariat (2010).
131
RTAs’ capacity to address multiple dimensions of economic and other

regional concerns that cannot be covered within the WTO framework.
Many countries are members of more than one RTA, some RTAs are
subgroups of larger groups, and many regional trade blocs negotiate a
further RTA or Economic Partnership Agreement with another regional
bloc. All of these aim for greater regional integration. Yet, they also add
complexity to trade relationships, as each RTA tends to have its own set
of rules and regulations, which may create contradictions and com-
plexities in managing overlapping relationships. In the case of SEZs, for
example, it may be that different trade agreements specify a different
treatment of SEZs.
Sub-Saharan Africa is not an exception in this regard. Figure 6.2 exhib-
its the current landscape of RTAs in Africa and Middle East.
Figure 6.2 Network of Plurilateral Groupings in Africa and Middle East
ECOWAS Qatar
Kuwait
Cape Verde Bahrain
Iraq
The Gambia UAE Oman
AGADIR Syria
Guinea Saudi Arabia
Lebanon
Sierra Leone WAEMU AMU Yemen GCC
PAFTA
Liberia Pal. Auth.
Mali
Ghana Niger Tunisia Jordan
Mauritania Morocco
Nigeria Burkina Faso Egypt
Senegal Algeria
Libya Sudan
Guinea Bissau
Benin Togo Chad Uganda
Central Afric. Rep. Ethiopia Kenya
Côte d’Ivoire EAC
Eritrea Rwanda
Equatorial Guinea
Comoros Burundi
Gabon Congo Djibouti
CEMAC
COMESA DR Congo Tanzania
Cameroon
Zambia
Zimbabwe
Malawi
Madagascar
Mauritius
Seychelles SADC
Namibia Swaziland Angola
Botswana Mozambique
Lesotho EFTA
SACU
SACU
EU MERCOSUR
South Africa
Source: Acharya, Crawford, Maliszewska, and Renard (2011).

A decomposition of RTA participants by the level of economic devel-

opment reveals another interesting trend. Increasing numbers of newly
signed RTAs involve both industrial and developing countries, with RTAs
among industrial countries growing almost fourfold between 2005 and
2009. RTAs involving both industrial and developing countries account
for more than two-thirds of the cumulative number of RTAs under nego-
tiation and signed as of February 2010.
Increasing numbers of RTAs, especially since the early 2000s, go
beyond the simple agreements on trade. They include rules and measures
to create harmonized frameworks of various cross-border policies among
participating members. Such rules and measures typically relate to cus-
toms administration, intellectual property, competition policy, technical
barriers to trade, sanitary and phytosanitary agreements, government
procurement, and investment. In this context, policies regarding SEZs
are also referred to in several agreements, including the East African
Community (EAC) and the Common Market for Eastern and Southern
Africa (COMESA).
The Performance of RTAs

The primary, short-term objective of RTAs is to increase trade and invest-
ment as a result of providing access to a larger market. But given that
many countries participate in various RTAs with different degrees of lib-
eralization, they may create additional complexity and, ironically, may
adversely affect trade relations.
The performance of RTAs in promoting trade has varied around the
world. Several RTAs signed in the 1990s appear to have contributed to
significant growth in intraregional trade, including the European
Economic Community, the Association of Southeast Nations (ASEAN)
Free Trade Area (AFTA), the Andean Community, and the South Asian
Free Trade Agreement (SAFTA). All of the member countries experi-
enced an increased share of intra-RTA trade to total trade following the
trade liberalization in the region. But other RTAs, including the
European Free Trade Association (EFTA) and the Central American
Common Market (CACM), actually experienced a stagnant or declin-
ing share of intra-RTA trade after the implementation of the agree-
ment. Finally, in some RTAs, significant growth in trade in the initial
years following the agreement later gave way to declining trade after a
certain period. These include NAFTA, the Gulf Cooperation Council
(GCC), the Closer Economic Relations Agreement between Australia
and New Zealand, and the Economic and Monetary Community of
Central Africa (CEMAC). The evolution of the intra-RTA trade is illus-

trated in figure 6.3, along with the indications of RTA implementation
and enlargement. When assessed in terms of intratrade’s contribution
to GDP, however, the results have been promising for most RTAs.
Except in EFTA, all of the major RTAs experienced growth in the ratio
of intra-RTA trade (export and import) to GDP since 1980s (Acharya,
Crawford, Maliszewska, and Renard 2011).
Various factors determine the effectiveness of RTAs. Coverage and the
degree of liberalization in the agreement appear to be among the most
important. In addition, many successful RTAs go beyond simple agree-
ments on tariffs and address comprehensive trade facilitation measures,
such as harmonized procedures and rules on behind-border procedures,
investment, and intellectual property rights. Also, RTAs appear to be
likely to yield a greater result when they are designed to align with over-
all economic reforms of member countries. RTAs that fail to get imple-
mented fully tend to be less successful, as do those with overlapping rules
of origin and tariff schedules, which complicate trade relations and pre-
vent member countries from integrating into global value chains. These
findings on RTA success factors suggest an important implication for SEZ
programs—that is, that harmonization and simplification of SEZ pro-
grams likely is crucial in the context of RTAs.
Implication of RTAS for SEZs

RTAs have, by and large, been successful in promoting trade among mem-
bers, but the existence of SEZs in countries within RTAs sometimes has
been problematic. This section will first discuss the reasons why SEZs and
RTAs can sit uneasily together. It then reviews how RTAs, particularly
those in Africa, have responded to these issues. Although SEZs vary sig-
nificantly in objectives, form, and function, those that are most problem-
atic in the context of RTAs are those that provide preferential tariff
treatment based on export performance. This is most commonly the case
in traditional EPZs.
Why is it an Issue?
The issues arising from the coexistence of RTAs and SEZs relate to trade
triangulation, competitiveness of local producers, promotion of regional
economic integration, and competitive positioning. This section discusses
each of these in turn.3
Figure 6.3 Evolution of the Share of Intra-PTA Imports in Total Imports, 1970–2008
ASEAN CACM
30 20
25
15
20
percent
percent
15 19% 10
18%
10 17%
5
5 8%
0 0
70
73
76
79
82
85
88
91
94
97
00
03
2006
08
70
73
76
79
82
85
88
91
94
97
00
03
2006
08
19
19
19
19
19
19
19
19
19
19
20
20
20
19
19
19
19
19
19
19
19
19
19
20
20
20
COMESA ECOWAS
10 20
8
15
percent
percent
6
10
4 11%
5
2
39%
0 0
70
73
76
79
82
85
88
91
94
97
00
03
2006
08
70
73
76
79
82
85
88
91
94
97
00
03
2006
08
19
19
19
19
19
19
19
19
19
19
20
20
20
19
19
19
19
19
19
19
19
19
19
20
20
20
EU Mercosur
70 25
60
20
50 62% 62% 66% 64%
percent
percent
40 53% 15
30 10 14%
20
5
10
0 0
70
73
76
79
82
85
88
91
94
97
00
03
2006
08
70
73
76
79
82
85
88
91
94
97
00
03
20 6
08
0
19
19
19
19
19
19
19
19
19
19
20
20
20
19
19
19
19
19
19
19
19
19
19
20
20
20
NAFTA WAEMU/UEMOA
50 12
40 10
8 10%
percent
percent
30 39%
6
20
4
10 2
0 0
70
70
73
76
79
82
85
88
91
94
97
00
03
2006
08
73
76
79
82
85
88
91
94
97
00
03
2006
08
19
19
19
19
19
19
19
19
19
19
19
20
20
20
19
19
19
19
19
19
19
19
19
20
20
20
Source: Acharya, Crawford, Maliszewska, and Renard (2011).

Note: ASEAN = Association of Southeast Asian Nations; CACM = Central American Common Market; COMESA =
Common Market for Eastern and Southern Africa; ECOWAS= Economic Community of West African States; EU=
European Union; Mercosur = Southern Cone Common Market (Mercado Commún del Sur); NAFTA = North American
Free Trade Agreement; WAEMU/UEMOA= West African Economic and Monetary Union (Union Économique et Moné-
taire Ouest-Africaine). The marked point (with percentage noted) in each panel indicates the date of entry into force
of the agreement (or enlargements, in the case of the EU) .
Trade triangulation. The primary concern for RTA members regarding

SEZs is the potential for trade triangulation. If a product processed under
a preferential duty scheme of an SEZ is allowed to enter into the customs
territory of an RTA member as an originating product, it opens the possi-
bility that any product not originating in an RTA may enter the RTA free
of duties through the SEZ. This could happen, for example, if a product
from Country A was shipped into a firm located in an SEZ in Country B
and subsequently was relabeled as “Made in Country B” or received a cer-
tificate of origin from Country B. In that case, the product could enter the
customs territory of Country B’s RTA (and therefore the markets of all
other countries in the RTA) with little to no value added within the RTA.
This would infringe on the tariff collection policies of RTA members and
potentially could erode the RTA’s bloc against extraterritory countries.4
From the perspective of RTA member governments, a second problem
with trade triangulation is that it has the potential to undermine FDI
opportunities in the territory. If an RTA prohibits the duty-free entry of
SEZ-processed products, foreign suppliers of inputs to SEZ operators
may consider setting up an operation in the territory so that their custom-
ers and thus themselves can take advantage of the expanded market
access resulting from the RTA. But when duty-free entry is possible
through an SEZ, foreign suppliers may have less incentive to invest in a
new operation in the territory.
Competitiveness of local producers. A producer operating under an SEZ

program typically benefits from preferential duty schemes, including but
not limited to drawbacks and suspensions of duties on imported equip-
ment and inputs. A local producer who pays full import duties on
imported equipment and inputs will therefore be at a disadvantage
against an SEZ operator if products processed under the SEZ program
can enter the RTA’s local market as originating products. In addition, the
financial incentives that may be available to SEZ-based producers (again,
particularly those based in traditional EPZs) often go beyond those
related to import duties. In many cases, these incentives are granted par-
tial or total exemption of direct and indirect taxes temporarily or perma-
nently, often on the condition that their export performance meets a
required threshold. Such special incentives for SEZ operators also put
local non-SEZ producers at a disadvantage if products from the SEZs are
allowed to enter local markets free of duty.5
Promotion of regional economic integration. Placing local suppliers at a

disadvantage against SEZ-based operators also may pose a threat to the
effectiveness of the RTA in promoting one of its primary objectives—i.e.,

regional economic integration—by hindering interindustrial integration
across member countries. If SEZ-based operators, including those engaged
in trading of foreign equipment and inputs, are allowed to sell their prod-
ucts to local producers in RTA member countries, they risk crowding out
immature local suppliers.6 Thus, local producers, even with greater access
to suppliers in another member country of the RTA, may choose to pur-
chase foreign inputs through SEZ-based operators, who may be able to
offer both a cost and a quality advantage. On the one hand, this should
improve the competitiveness of local producers (through their access to
higher quality, lower cost inputs) at least in the short term; on the other
hand, it may curtail the effectiveness of the RTA in nurturing local sup-
pliers and promoting local vertical industrial linkages.
Competitive positioning of the SEZ. The flip side to promoting regional

integration is that firms based inside the SEZs may suffer a deterioration
of the relative advantages they enjoyed before the RTA. Specifically, as
many of the fiscal benefits provided in traditional EPZs are linked directly
to exports (or at least dependent on the firm serving export markets), the
RTA essentially turns what were regional export markets for these firms
into “domestic markets.” This not only puts these firms on a more level
playing field in terms of market access versus non-zone-based firms, but
also may have implications for zone-based firms to maintain the export
requirements on which their incentives are based. The implication is that
this market access potentially reduces some of the advantages of being
based in the SEZs, and thus has implications not only for the zone-based
firms but also for existing zone developers and managers (which, in many
countries, is the government).
The Response of RTAs to Tariff-Related Issues

RTAs have taken various approaches in response to the problematic issues
of SEZs. In particular, most RTAs have implemented a system to avoid strict
duty-free entry of products processed under SEZ schemes, although the
degree of stringency varies from one RTA to another. This section explores
the main approaches taken by RTAs in controlling the entry of SEZ-
processed products into the RTA territory. It then reviews some cases in
which RTAs responded to the needs of particular countries, as well as cases
in which RTA member countries reacted to an RTA’s policy on SEZs.
Major approaches. Most RTAs take measures to prevent the products

processed in SEZ from freely entering into the territory, but how they
achieve this and how restrictive they are varies widely. Most RTAs do
so either by establishing a special rule on the treatment of products
processed in SEZs of RTA member countries or by applying rules of
origin that are generally applicable to products processed anywhere in
the RTA.
Special clause for SEZ-processed products. Many RTAs set out a special
clause to stipulate how the goods from SEZs in member countries should
be treated in the context of the RTA. Examples include the EAC customs
union and the West African Economic and Monetary Union (WAEMU, or
UEMOA from its French name). Many of these RTAs establish an article
to address specifically the entry of SEZ-processed products into the prin-
cipal protocol of trade or an additional protocol, although some unions
set a rule in the annexes of the trade agreement. The most stringent rule
takes the form of complete prohibition of the entry of products processed
under SEZ programs into the RTA territory. NAFTA is the only major
RTA that applies such stringent rules—this agreement was implemented
over a seven-year transitional period through 2001.
All other RTAs reviewed in this study that include a special clause
on SEZ-processed products stipulate that such products may not ben-
efit from the status as an originating product. Unlike rules of origin,
this rule usually applies regardless of the level of local content of
products. There are some variations in how RTAs define the products
subject to the special clause. Some RTAs refer to goods processed in
SEZs, whereas others describe these goods as goods processed under
special tariff regimes. None of the RTAs reviewed in this study refers
to whether the MFN status would apply to SEZ-processed products
that cannot benefit from the status as an originating product. Yet, in
practice, these products that do not carry a certificate of origin are
subject to normal tariff schedules.
Many RTAs, although not all, set up exceptions to this rule in various
dimensions. For example, some RTAs accept products processed in SEZs
as originating products if import duties are paid on the inputs of these
products. In Africa, WAEMU adopts this type of exception rule. WAEMU
also has a unique exception rule that SEZ-processed products can be
granted the status as an originating product if the import duties applied
on their inputs are greater than those that would be applied on finished
goods. Another type of exception, such as that in the RTA agreement
between Central America and the Dominican Republic, allows for the
entry of SEZ-processed products under the same terms as the host
country if the SEZ allows the entry of such products into their own
domestic market.
Rules of origin. Many RTAs that do not establish a specific clause for the
treatment of products from SEZs simply apply rules of origin. Rules of
origin is a standard and widely used method of avoiding trade deflection
or tariff-jumping in cases in which a product enters into the trade area
through a low or no-tariff member country to exploit the duty-free
nature of the RTA. To some extent, rules of origin can restrict the entrance
of SEZ-processed products because SEZ operators generally have a rela-
tively high import ratio and thus may not meet the rules-of-origin
requirement. Yet, when the local content requirement is sufficiently low,
SEZ operators still can benefit from both duty-free import (SEZ) and
duty-free access to a greater market (RTA). For example, COMESA
applies relatively loose rules of origin and it allows up to 60 percent of
extraterritory inputs.7 Under such a generous rule, many SEZ operators
may be able to take advantage of both SEZ and RTA, placing local pro-
ducers at disadvantage.8 Conversely, stringent rules of origin, such as
those proposed at the Southern African Development Community
(SADC) Free Trade Area, also can be problematic. When rules are too
strict, local producers are at a competitive disadvantage against foreign
producers because they are forced to purchase costly local inputs. In an
extreme case, foreign producers may be able to sell products at a cheaper
price than an RTA’s local producers, especially when external tariff rates
for finished goods are not so high (Flatters 2002).
No rule. Among those RTAs reviewed in this study, a few have neither a
special clause on SEZ-processed goods nor rules of origin. In most RTAs,
however, the SEZ issue has been raised as a concern. In such cases, either
a special clause or rules of origin or both are being discussed. These
include the agreement between Dominican Republic and the Caribbean
Community, in which case a special agreement on the treatment of prod-
ucts from free zones has been proposed. The proposed arrangements
include (1) products from SEZs must not enjoy additional advantages to
those they now enjoy in the different customs territories, and (2) they
must enjoy no less favorable treatment than what they now enjoy in
reciprocal trade (Granados 2003).
Figure 6.4 summarizes the classification of various tariff-related mea-
sures taken by RTAs discussed above. Appendix 6.B contains a list of how
various RTAs treat SEZ-processed goods.
140
Figure 6.4 Classification of Various Tariff-Related Measures by RTA
Outcome Examples
Entry banned NAFTA

Bans entry or allows
entry as Ban
nonoriginating
products
Entry allowed as nonoriginating EAC, ECOWAS (may follow

products UEMOA), GCC, MERCOSUR
Yes No
Allows as
nonoriginating Exception to allow
Special clause to products entry as originating In general, entry allowed as
exclude EPZ- products? nonoriginating products. Entry
processed goods allowed as originating products
from “originating under certain situations – e.g.:
Yes UEMOA
products” • Import duties paid on input
• Host country of EPZ allows
sales of EPZ products in
domestic market
No Depends on level of local

content and/or subject to tariff
SADC, COMESA, AFTA
classification test (Rules of
Yes origin)
Rules of origin?
No
Entry allowed as originating
CACM
products (or no rule)
Source: Author.
Note: AFTA = ASEAN Free Trade Area; CACM = Central American Common Market; COMESA = Common Market for Eastern and Southern Africa; EAC = East African Community; ECOWAS =
Economic Community of West African States; GCC = ; Mercosur = Southern Common Market; NAFTA = North American Free Trade Agreement; SADC = Southern African Development
Community; UEMOA = West African Economic and Monetary Union.
Country- and Region-Specific Cases

In some cases, the incompatibility of a country’s existing SEZ program
with the rules under a newly established RTA constitutes a significant
impediment to the country’s trade and investment potential. The responses
of countries and of trade blocs to these challenges have varied consider-
ably, depending on factors such as the region, government’s leadership, and
the importance of intra-RTA trade for existing SEZ operators. In some
countries, such as Mexico under NAFTA, governments modified their
zone policy to overcome such challenges and grandfathered in existing
investors. In other countries, such as Uruguay under the Southern
Common Market (Mercosur), in the absence of any significant govern-
ment policy initiatives to redress the challenges, industries evolved to
adjust themselves to the new environment. In some cases, an RTA has
allowed for temporary exceptions to consider country-specific circum-
stances (e.g., SADC). Following is a brief review of some of these country-
or region-specific cases.
Mexico. NAFTA, which came into force in January 1994, set a strict
prohibition on the entry of goods processed under SEZ schemes, within
a seven-year transitional period. At this same time, Mexico’s exports from
the maquila program had increased substantially, reaching 41 percent of
the country’s total exports and accounting for 1.3 million jobs by 1998.
With most products from maquila exported to the United States, it was
critical for the Mexican government to find a solution to comply with the
NAFTA requirement without dampening fast-growing industries. As a
part of the policy response, Mexico established the Sectoral Promotion
Program. This program grants registered companies MFN tariff prefer-
ences, which are 5 percent or less in most cases, on more than 5,000
inputs used in production. Companies engaged in specified industries9
are eligible to register for and benefit from this program. Critically, this
preferential tariff treatment is not contingent on export performance, and
it applies equally to exporters and to companies who sell to the domestic
market, thus ensuring that it is in compliance with NAFTA. This is a suc-
cessful case in which a country managed to comply with an RTA’s strin-
gent rule on export-based special incentives by shifting from an
export-oriented program to a sector-focused one (Granados 2003).
Uruguay. Facing a similar challenge with its participation in Mercosur,

in 1994, Uruguay had little scope to restructure its incentives regime.
Under Mercosur’s Decision 8, goods processed or entered into SEZs are
treated as extraterritory products and thus are subject to external tariffs

and are not granted certificates of origin. Although a transitional period
was allowed for the Manaos free zone in Brazil and the Tierra del Fuego
free zone in Argentina (because of their location in “lagging” peripheral
regions), Uruguay could not secure such an exemption for its SEZs. The
Uruguayan government did not take a particular initiative to mitigate the
impact of Decision 8 on existing SEZ operators. Thus, SEZ operators
were forced to adapt to new rules and find a way to survive. Within a few
years, the nature of activities in the SEZ had changed considerably, refo-
cusing toward the changing comparative advantage of Uruguay within
the region. Specifically, firms began focusing on offshoring (including
financial services) and logistics activities, positioning the zone as a gate-
way into Mercosur for firms based outside of the regional bloc. By 2005,
only 27 percent of exports from SEZ operators in Uruguay were destined
to Mercosur. This shift was supported by a later government policy,
which responded to the evolution of SEZ activities by endorsing a tax
reform to allow all types of offshore activities in SEZ and by granting
some incentives, including the elimination of accounting requirements
for companies whose assets are all offshore (Granados 2003; Malaver
2009). Thus, despite a pessimistic prospect of SEZ continuity after the
launch of Mercosur, SEZ operators in Uruguay adapted to the new envi-
ronment and some of them now generate high incomes. Yet, unlike the
Mexican case, its development is parallel to the regional integration under
Mercosur, and no synergy exists between the RTA and SEZ programs.
Kenya. The EAC customs union, which came into effect in 2005, clearly
excludes SEZ-processed goods from benefiting from the status as origi-
nating products. Among five member countries, only Kenya had the
potential to be affected immediately, because it is the only country that
had established a sizable SEZ program at the signing of the customs
union. Most current users of SEZs are not affected by Kenya’s integration
into EAC customs union either, because their major export destinations
are outside of the EAC (mainly to the United States and Europe). Thus,
Kenya’s SEZ program has not been forced to address reform, so far.
However, there is no guarantee that the impact will remain limited in the
future. Kenya’s full integration to EAC customs union is likely to change
the economic rationale of potential investors, leading to more invest-
ments targeting the large EAC market. Indeed, some investors in the
SEZs are already requesting Kenyan authority to loosen the current rule
that requires all SEZ firms to export at least 80 percent of their output
and allow them to sell more to the EAC market (Manchanda 2010). The
current request does not relate to the treatment of tariffs on finished
goods entering into EAC territory, but rather to the minimum export
requirement to reside in SEZ areas. However, once the SEZ tenants are
allowed to sell more to EAC territory, the question of the tariff on the
goods processed in the SEZ will undoubtedly arise as an issue among
EAC member countries.10
SADC. Although SADC does not set specific rules governing the entry
of SEZ-processed goods, it has proposed restrictive rules of origin, requir-
ing high local content for any import into the RTA territory to take
advantage of duty-free access. At the same time, however, some excep-
tions are granted to accommodate the circumstances of member coun-
tries and sectors. In particular, it allowed temporary special arrangements
for textiles and garments exports from Malawi, Mozambique, Tanzania,
and Zambia to the partner countries of the Southern African Customs
Union (SACU) (Botswana, Lesotho, Namibia, South Africa, and
Swaziland). This special arrangement, which expired in 2009, enabled the
manufacturers in the four countries to continue procuring fabrics from
outside SADC for duty-free sales to SADC, during which time the coun-
tries were expected to develop their local fabric-producing capacity. This
arrangement included all textiles and garments produced in SEZs. It pro-
vides an example in which an RTA flexibly adjusted its rules considering
the significance of the industry—in this case, textiles and garments—for
some member countries as well as the volume of its trade within the
region. Although the policy does not focus specifically on SEZs, a similar
approach could be taken, by which an RTA establishes a special arrange-
ment for SEZ-processed goods. This approach could be especially helpful
when a practical approach is necessary to allow member countries time
to adjust their national policies and to enable existing investors to restruc-
ture their business under the new RTA context.
Harmonization of SEZs: Beyond Tariff Issues

The previous section discussed how RTAs take various measures to con-
trol the entry of the goods processed in SEZs. Yet, this approach merely
constitutes a passive response to the issues arising from the overlap of
SEZ and RTA. It addresses potential risks caused by the SEZs, but it
misses out on the potential to develop synergies between the SEZ and
RTA instruments, specifically to enable SEZs to leverage and promote
regional integration under the context of RTAs. In practice, few RTAs

have made efforts toward harmonization of SEZ programs among mem-
ber countries, although some discussions and initiatives have been
launched, for example, by EAC and COMESA.
In several potential areas, however, the complementarities between
SEZ and RTA could be better exploited, including the following:
• Harmonizing regulations
• Taking collective action to lower or remove financial incentives (e.g.,
general investment incentives)
• Establishing strategic frameworks as a region, such as the following:
° Joint marketing of region as investment destination
° Creation of industrial linkages among SEZs in RTA
° Specialization of SEZs based on comparative advantage relative to
other members in RTA
This section explores the opportunities that harmonized SEZ programs

might generate for RTA member countries and the challenges in doing so.
The discussion in this section is most relevant for RTAs within the con-
text of regional integration agreements; it will be less relevant for bilateral
or multilateral trade agreements that have no integration component or
that involve countries that are not proximate.
Regulatory Framework
Having simple, straightforward regulations helps a country to promote
investment by lowering investors’ costs of search and compliance. The
same logic applies to the SEZ-related regulations within an RTA. When
investors consider exploring a new market or opening a new production
site, they will research and compare the investment-related laws, includ-
ing SEZ regulations across all potential locations in a chosen region. They
are likely to assess various factors, including the existence and details of
the SEZ law, the requirements for establishing operations in the zone, the
fiscal and nonfiscal incentives available, how application and registration
processes are managed, and whether a competent zone authority has
been established. Having clear SEZ rules and consistent definitions of
terminologies across member countries reduces the search costs for inves-
tors, allowing them to focus more on strategic factors, such as target
customer base, suppliers, distribution network, and so on. More attractive
regulations, infrastructure, or incentives may help a country to win an
investment over its neighbors, but harmonized SEZ regulations across an

RTA may be a powerful tool through which to compete against other
regions to ensure that an investment comes into the RTA. Perhaps most
important, such a harmonized approach then allows SEZs in each mem-
ber country to compete for an incoming investment based on their own
sources of comparative advantage.
Coordination among member countries on regulations yields another
benefit, especially to the government whose credibility is perceived as
questionable by investors. By binding together within the RTA, govern-
ments are less likely to change their regulations, as the cost of deviating
from the RTA agreement may be higher than the benefits that would
accrue from altering an individual regulation. This provides predictability
to investors, which is critical to building a long-term, sustainable business
base in the country.
Harmonizing regulations is, of course, more easily said than done.
Each country inevitably will have its own agenda. Even when some
member countries are ready to simplify and harmonize the regional rules,
others, especially those that are economically lagging, may see offering
more favorable or liberal SEZ rules as a potential means of attracting
investment and “catching up” to their neighbors. Also, each country has a
different level of political and administrative capacity. Thus, it takes a
long time for all parties to agree. One potential solution is to set a tran-
sitional period to allow each member to discuss the changes and their
implications with existing investors, and adjust their national SEZ poli-
cies. Such efforts will not only help establish integrated SEZ rules but
will also be a step toward harmonizing the overall investment laws
among RTA member countries. Finally, countries without experience
with SEZs can leverage the experiences of more advanced neighbors by
consolidating their programs, although the caveat remains that the exist-
ing SEZ programs of advanced neighbors may not necessarily represent
“best practice.”
Financial Incentives
Different structures and levels of financial incentives among SEZs of
member countries pose further problems than simply adding search costs
for investors. First, differences often involve export-performance-based
conditions, which usually are incompatible with the RTA framework and
with the WTO rules. Second, when member countries compete for
investment by offering ever-greater financial incentives, they risk eroding
their tax bases without necessarily attracting more investment than they
otherwise would—in effect, transferring rents directly to (usually multi-
national) investors.
Among various incentives, export-based incentives, a form of incen-
tives that most SEZs employ, are particularly problematic. As is clear
from the discussion in the previous section, export-based tariff-related
incentives prevent member countries from taking full advantage of
potential synergies between RTA and SEZ programs. Such incentives
motivate member countries to rule out the possibility of SEZ-processed
products enjoying RTA benefits or, in extreme cases, they prohibit the
entrance of such goods into the RTA territory altogether to prevent
tariff-jumping.
As is the case with regulatory harmonization, removing or unifying
financial incentives among member countries takes time, especially if
some member countries have established SEZ programs in which many
investors are already granted with permanent exemption or reduction of
tariffs or other taxes. Even if a country currently does not have financial
incentives for SEZ operators, it may feel pressure from potential and
existing investors to establish one, particularly if many of its neighbors
have them. Yet, the advantage of investment promotion through financial
incentives should be balanced with the potential loss of a tax base as well
as lost opportunities from synergies with RTAs. Also, by aligning the fac-
tors that are most evident and most frequently exposed to comparison
(i.e., quantifiable financial incentives), member countries can establish a
foundation on which they can move forward to discuss strategic develop-
ment and integration on equitable terms. To remove the most problem-
atic form of financial incentives based on export performance, countries
can learn from Mexico, which managed the participation in NAFTA by
shifting incentive programs away from export-based ones to those based
on other type of performances, such as investment amount or employ-
ment generation.
Strategic Framework
Ideally, an RTA would establish an integrated strategic framework for SEZ
programs of member countries, not only establishing rules of the game
with respect to financial incentives, but more broadly, enabling them to
complement each other’s resources and capacities and cooperate to
achieve shared goals.
An integrated strategic framework can take several forms. One such
form is to develop regional manufacturing or service linkages, using the
SEZs as hubs. By combining and coordinating efforts to strategically fos-

ter SEZ-based clusters that take advantage of complementary endow-
ments of different member countries, member countries can help sectors
leverage SEZ infrastructure and RTA depth to overcome limitations of
scale and specialization. This might facilitate improved backward linkages
in critical sectors like garments. Such integration of regional value chains
within SEZs might also represent an important test case toward deeper
regional economic integration.
Furthermore, in parallel to the “soft” elements of regional integration,
such as trade agreements, many developing countries and their donors are
placing vast resources on transportation infrastructure to connect regional
producers to markets. Developing these regional industrial linkages
through SEZs also makes sense in this context, if countries wish to lever-
age the improved transport corridors that allow smoother and more cost-
effective logistics within the region.
Cooperation on strategic framework can also take the form of cobrand-
ing and comarketing of SEZs in the region. Members of an RTA typically
promote investment by advertising the potential to access the wide
regional market. In this context, it would be natural (and certainly cost-
effective, particularly for small countries with limited investment promo-
tion budgets) also to consider advertising the region’s SEZs collectively as
investment destinations.
Again, this is more easily said than done. On the one hand, SEZ pro-
grams are meant to be the pilot test for investment promotion policies for
countries with limited resources and are intended to generate quick suc-
cesses. On the other hand, coordinating among countries takes time.
Therefore, how to handle the balance between quick wins and long-term
strategy and how to handle the transition from a stand-alone policy to a
regional policy are critical issues when considering the harmonization of
SEZ strategic frameworks.
Cases of SEZ Harmonization

While regional harmonization of SEZ policy remains in its infancy, fol-
lowing are brief descriptions of two regions—in Southeast Asia and in
East Africa—in which some initiatives have been taken.
Growth triangles in Asia. In 1993, Indonesia, Malaysia, and Thailand

launched the subregional growth triangle—the “transnational export pro-
cessing zone”—to accelerate their subregion’s economic growth and indus-
trial transformation. As growth triangles create greater economies of scale
and allow firms to exploit complementarities and comparative advantages

of member countries in various production factors, such as natural
resources, low labor costs, and technology, they may offer greater potential
to attract investments than standalone SEZ programs. In addition to the
coordinated investment in infrastructure and human resources, the gov-
ernments of these three countries are trying to harmonize regulations
governing investment, tax, land, labor and immigration, and customs to
market this subregion effectively to investors. This growth triangle is fos-
tering economic expansion of participating regions through industrial
linkages and by positioning the area as an integrated manufacturing base
of various high value-added products. These linkages have contributed to
developing advanced manufacturing as well as R&D capacity across the
region. Many other subregions followed similar triangle initiatives, includ-
ing the growth triangle between Singapore, Johor in Malaysia, and Riau
Island in Indonesia.11
Harmonization of export processing zones programs in EAC. As a rare

example, the EAC customs union formed an extensive annex to establish
a common regulatory framework on EPZ in the member countries. As
Article 2 of the regulations state, they were created to ensure that the
process regarding EPZ is “transparent, accountable, fair and predictable.”
They first define the terminologies related to EPZs, including “EPZ” itself,
“export,” and “duties and taxes,” so that these words are used consistently
by all member countries. They also set out permitted activities in EPZs,
define the establishment and function of competent authorities, stipulate
how EPZ-processed goods are treated when entering into the territory,
and identify how complaints are to be resolved.
The Investment Climate Advisory Services (CIC) of the World Bank
Group is engaged by a multidonor facility to work with EAC to promote
its regional trade in the region, and part of its work covers the advisory
for SEZ programs. As of April 2009, CIC’s global SEZ team assessed the
current SEZ programs in the region and made preliminary recommenda-
tions on harmonization to the EAC and host governments. In terms of
spatial mapping, most of the region’s zones are located close to the major
transport corridors. Given the considerable upgrading of these infra-
structure networks that facilitates smooth and cost-effective transport
among SEZs, the CIC team suggested that the EAC countries consider
developing regional linkages, because current manufacturers in SEZs
have limited transactions among them and their capacity for specializa-
tion is limited. Other recommendations include jointly marketing SEZs
for priority sectors such as ICT considering the importance of sectors for
all member countries as well as the small size and resources of each
country. These are preliminary recommendations, and EAC member
countries have not yet taken any significant steps to implement them.
Yet, these countries have made first steps to unify the regulatory frame-
work and establish competent authorities that will have similar powers
across member countries. How effectively the EAC member states build
on this common ground and integrate their SEZ program is likely to play
an important role in their ability to take full advantage of the customs
union and transport facilities to achieve greater regional integration,
more effective trade and investment, and, ultimately, more rapid and
sustainable growth.
Conclusion
When a country participates in an RTA, export-based preferential tariff
treatment (a typical incentive granted under SEZ programs) poses prob-
lems such as tariff-jumping and raises concerns over local business com-
petitiveness. Because such preferential treatment tends to be granted for
a certain period of time, these incentives cannot be removed immediately.
Therefore, preventing duty-free entrance of SEZ-processed goods is prob-
ably a necessary measure as an immediate response to protect the effec-
tiveness of an RTA. Although it may be a best available temporary
measure at the introduction of a RTA, more creative solutions may be
appropriate in the longer term to avoid creating a mutually exclusive
system between these two instruments of trade and investment: RTAs
and SEZs. It would also be worthwhile for RTAs to consider options to
provide exceptional treatment or a transitional period under special cir-
cumstances to allow a smoother transition to greater integration, as the
case examples from NAFTA and SACU illustrated.
In addition to passive responses to these issues rising from RTAs and
SEZs, RTA member countries should move forward to consider harmoniza-
tion of SEZ programs to further promote regional integration. Traditionally,
SEZ have been employed as a country-specific policy instrument. Therefore,
coordinating among member countries on regulatory framework, financial
incentives, and strategic framework of SEZ program can be a challenging
and time-consuming task. Such collective efforts have the potential not
only to yield the short-term benefits in the form of trade and invest-
ment, but also to build collaboration toward deeper regional economic
integration.
Appendix 6.A Regulations and Handbooks of Regional Trade

Agreements
ASEAN Free Trade Area (AFTA)
• ASEAN Trade in Goods Agreement, Cha-am, Thailand, February 26,

2009
• Annexes of the ASEAN Trade in Goods Agreement, Cha-am, Thailand,
February 26, 2009
• Protocol to Amend the Agreement on ASEAN Preferential Trading Ar-
rangement, Bangkok, December 15, 1995
• Agreement on the Common Effective Preferential Tariff Scheme for
the ASEAN Free Trade Area, Singapore, January 28, 1992
Common Market for Eastern and Southern Africa (COMESA)
• COMESA Treaty
• Protocol on the rules of origin for products to be traded between the
member states of the COMESA
East African Community (EAC)
• The EAC Customs Union Regulations, Annex VII on Export Processing

Zones
Economic Community of West African States (ECOWAS)
• Treaty of the ECOWAS

• Protocol relating to the definition of the concept of products originat-
ing from member states of the ECOWAS
Gulf Cooperation Council (GCC)
• The Customs Union of the GCC Member States, January 2003
Southern African Development Community (SADC)
• SADC FTA Handbook 2008

• Protocol on Trade
West African Economic and Monetary Union (WAEMU, also UEMOA)
• Acte additionnel n° 04/96 / 1996

• Protocole additionnel n° III/ 2001
• Protocole additionnel n°I/2009
Appendix 6.B Summary of Tariff-Related Measures Taken by Regional Trade Agreements for Special
Economic Zone–Processed Goods
Treatment
Agreement (Summary) Source Treatment Definition of products subject to the rule
Agreements in Africa
Common Market Rules of origin Protocol on the rules of Rules of origin apply: imported inputs less n.a.
for Eastern and origin for products to be than 60 percent; production value added
Southern Africa traded between the at least 35 percent; or goods transformed
(COMESA) member states of the into another tariff heading. Goods of
COMESA particular importance have lower
requirements.
East African Special The EAC Customs Union Will be treated as goods imported into the Goods which are brought out of an
Community regulations on Regulations, Annex VII on customs territory of RTA. export processing zone and taken into
(EAC) SEZ-processed Export Processing Zones any part of the customs territory for use
goods in the customs territory, or services
provided from an export processing
zone to any part of the customs territory
Economic Special Article 7 of Protocol Shall not be considered as originating Goods transformed within the framework
Community of regulations on relating to the definition products. of economic or suspensive customs
West African SEZ-processed of the concept of regimes or certain special regimes
States (ECOWAS) goods products originating involving the suspension or partial or
from member states of total exemption from customs duties on
the ECOWAS inputs

151
152
Appendix 6.B continued

Treatment
Agreement (Summary) Source Treatment Definition of products subject to the rule
Southern African Rules of origin SADC FTA Handbook and Unless wholly produced/obtained, two n.a.
Development Annex I of Protocol on tests apply: limited import test (threshold
Community Trade (Concerning The varies by product) and HS tariff
(SADC) Rules Of Origin For classification test. Special arrangement
Products To Be Traded for textiles and garments exports of
Between The Member Malawi, Mozambique, Tanzania, and
States Of The SADC) Zambia to South Africa and to the
Southern African Customs Union.
West African Special Article 8 of Additional Cannot benefit the status of originating Goods transformed under special regime
Economic and regulations on Protocol on Trade products. Exceptions are: when taxes on that partially or totally suspend or
Monetary Union SEZ-processed (Revised in Additional utilized materials are paid and for exempt import duty on inputs, goods
(WAEMU, goods Protocol N.1/2009.) manufactured products for which the transformed under economic or
UEMOA) inputs are taxed higher than finished suspensive customs regime
products.
Agreements in Southeast Asia (cited in this chapter)
ASEAN Free Rules of origin Rules of Origin for the Rules of origin apply: local content must n.a.
Trade Area Agreement on the be at least 40 percent or goods
(AFTA) Common Effective transformed into another tariff
Preferential Tariff Scheme classification at four-digit level.
Exceptions exist.
Other Agreements (cited in this chapter)
Gulf Special Article 4 of Principles of Shall be treated as imports from non-GCC Foreign goods imported from the free
Cooperation regulations on the Customs Union in member states, and shall be subject to zones within the GCC states
Council (GCC) SEZ-processed the Customs Union customs duties once taken out from the
goods of the GCC Member free zones.
States January 2003
Southern Cone Special Resolution CMC/DEC These goods are subject to the payment of Goods under the regimes of free trade
Common Market regulations on N8/94 the common external tariff or the zones, industrial zones, export
(Mercosur) SEZ-processed national customs tariff as the case may processing zones and special customs
goods be. areas
North American Special Article 303 and its annex After the transitional period, paid duties Refers to goods processed under
Free Trade regulations on cannot be refunded and customs duties programs of duty drawback and deferral
Agreement SEZ-processed on goods for export, or that are to be
(NAFTA) goods included in other goods for export, or
substituted for other goods for export to
the territory of another member of the
agreement, cannot be reduced or
exempted, in an amount that exceeds
the lesser between the total amount of
customs tariffs paid or levied on imports
of the good to its territory, and the total
amount of customs tariffs paid to the
other member with respect to the good
that is later exported to the territory of
that other member.
Source: Author, based on review of regional trade agreements.
153
Notes
1. Multiple variants of regional trade agreements and terminologies are not
always used consistently by different institutions and researchers. This report
uses the generic term of “regional trade agreement” to refer to all reciprocal
preferential agreements, including free trade agreements, customs unions,
partial scope agreements, and economic integration agreements. For more
detail, refer to Acharya, Crawford, Maliszewska, and Renard (forthcoming).
2. Some SEZs, normally traditional EPZs, target foreign investors explicitly by
setting the eligibility criteria of foreign capital. Others do not limit the zones
to foreign investors, but other eligibility criterion often become too high a
hurdle for domestic investors, especially those with limited capital. More
recently established zones, particularly those under the more modern SEZ
models, encourage domestic as well as foreign investment.
3. Most of the discussion in this section is drawn from Granados (2003).
4. Although erosion of the bloc constitutes one of the major reasons why
RTAs takes measures against allowing the duty-free entry of SEZ-processed
goods, a liberal trade policy would argue against any bloc attempting to
raise trade barriers against countries outside the bloc. Such a barrier typi-
cally would lead to trade diversion and goes against the principles of “open
regionalism.”
5. WTO prohibits subsidies and other financial incentives that are conditional
on export performance. Therefore, various schemes of SEZs also raise an issue
for WTO accession and compliance. This chapter focuses on the discussion of
SEZs and RTAs and leaves the discussion of WTO compatibility to other
literatures.
6. Indeed, this “infant industry argument” is one of the primary contentions of
many countries for maintaining tariffs on foreign producers. This is a contro-
versial argument, which various empirical research has both refuted and
supported.
7. Although 60 percent is the general rule, the actual rule is more complex and
depends on product categories.
8. Taking advantage of COMESA’s rules of origin, South African juice makers
process and package South African juice concentrate in a free zone in
Mauritius for sale in the COMESA market. See box 4 of Flatters (2002). The
example is cited as a successful case of investment generation through a lower
requirement of local content. Yet, at the same time, this practice may be plac-
ing local juice producers at disadvantage.
9. Eligible industries include electrical, electronic, furniture, toys and sporting
goods, footwear, mining and metallurgy, capital goods, photographic, agricul-
tural machinery, various industries, chemicals, rubber and plastics, iron and
steel, medicines and medical equipment, transport, automotive and vehicle
parts, paper and cardboard, leather and hides, textiles and clothing, chocolates
and confectionary, and coffee.
10. While it is considered in practice that 80 percent minimum export
requirement may apply to SEZ operators, technically, it may not be the
case when the EAC agreements are analyzed. Whereas the EAC Customs
Protocol stipulates that an 80 percent minimum export requirement
applies to any “export promotion scheme,” that is, economic benefit con-
tingent on export performance, it is not clear whether this rule applies to
SEZs. First, the extraterritoriality of SEZs may make the export promotion
argument irrelevant for SEZs. Second, analysis of the agreements, particu-
larly Part G of the EAC Customs Protocol, reveals that free ports and
other special economic arrangement do not constitute an “export promo-
tion scheme.”
11. See Landingin and Wadley (2005) and Australia Department of Foreign
Affairs and Trade (2005) for more examples of Asian growth triangles.
References
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Baldwin, Richard. Forthcoming. “Economics.” In Handbook on Preferential Trade
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PA R T I I

Can SEZs Deliver Structural Change?
CHAPTER 7
When Trade Preferences and Tax

Breaks Are No Longer Enough: The
Challenge of Adjustment in the
Dominican Republic’s Free Zones
Jean-Marie Burgaud and Thomas Farole
Introduction
One of the original pioneers of free zones (FZs), the Dominican Republic
is probably the Western Hemisphere’s most widely recognized success
story in the literature on free zones. Indeed, few other countries world-
wide have used the free zones program as effectively as an engine of
diversification and growth. Fueled by the offshoring of the U.S. textile
and garment industry (see box 7.1) and supported by preferential trade
agreements and a favorable exchange rate policy, the FZs were principally
responsible for the Dominican Republic’s shift away from a commodity-
oriented economy, with the manufacturing sector growing from just 18
percent of GDP in the 1970s to 30 percent by the 2000s. GDP growth
in the Dominican Republic has far exceeded the regional and global aver-
age in every decade since FZs were established. At its peak in 2003, FZ
companies accounted for 7.5 percent of total GDP in the country.
159
Box 7.1
The Apparel Sector in the Dominican Republic

Since almost the start of the FZ program, and until the recent crisis, apparel was
the star of Dominican Republic’s FZ, to the extent that it gave birth to several lead-
ing companies in the region. Bratex International, created in 1988, became the
largest exporter of brassieres in Latin America and the Caribbean. The company,
created in 1988, developed its own patent for a model of brassiere, which required
special equipment for its production, and reached an agreement with DuPont for
its commercialization. Interamericana Products International, started in 1985,
developed to become a full-package service provider by 1995. The company
grew to include Claiborne, Lee, Levi’s, and Eddie Bauer among its clients. Finally,
Grupo M became the largest apparel manufacturer in the Caribbean, employing
up to 14,000 workers in the Santiago FZ and in the Dominican Republic. The com-
pany now employs only 4,000 in the Dominican Republic, but another 4,000 in a
FZ the group created in Haiti (see box 7.3).
At its height, Dominican Republic’s FZs had about 5 percent market share in
the United States. However, this has now fallen to around 2 percent. According to
U.S. trade statistics (see http://otexa.ita.doc.gov/msr/catV1.htm), U.S. imports of
Dominican apparel fell by 28 percent during the first eight months of 2009, com-
pared with same period of previous year—more than twice the rate of decline for
U.S. imports overall and higher than the declines experienced by regional com-
petitors such as Nicaragua (11 percent), El Salvador (18 percent), Honduras
(22 percent), and Guatemala (26 percent), all of which offer lower labor costs than
the Dominican Republic.1
Source: Authors.
After rapid growth in FDI and exports throughout the 1980s and most
of the 1990s (FDI, for example, grew 37 percent per year between 1994
and 1999), over the past decade, the Dominican Republic has faced sig-
nificant threats to their FZ-based economic model. Between 1999 and
2003, a rise in oil prices; global economic slowdown; the impact of
September 11, 2001, on tourism; and the collapse of the second-largest
Dominican private bank, Baninter, all contributed to slowing growth in
the Dominican Republic economy. But for the FZ sector in particular, the
end of the MFA and the growing dominance of Asian manufacturing
threaten the future of the Dominican Republic’s textile and garments-
exporting sector, which is at the heart of the FZs. The program has
The Challenge of Adjustment in the Dominican Republic’s Free Zones 161
stagnated since 2004 in terms of its value added, with its subsequent
contribution to national GDP halving in only five years.
In response to this stagnation, the government has attempted some
policy reforms in the FZ sector and given policy priority to wider eco-
nomic competitiveness. Among other measures taken in recent years,
customs procedures were streamlined, tariffs were reduced, import sur-
charges and export taxes were eliminated, and new legislation was
adopted on government procurement, competition policy, and intellec-
tual property rights. On the trade policy side, the Dominican Republic
signed the FTA among the Dominican Republic, Central America, and
the United States (DR-CAFTA) and the economic partnership agree-
ment (EPA) between the European Union and the Caribbean Forum of
African, Caribbean, and Pacific States.
It appears, however, that the malaise in the FZ sector has deepened
through the recent global economic crisis. Since the beginning of 2009,
exports have declined considerably. Although there is some evidence of
slowly increasing diversification in manufacturing and a shift to more
value added production activities as well as services in the FZs, many
argue that the FZ program is principally to blame for the economy’s
overdependence on apparel manufacturing and its relative failure to
adjust to changing comparative advantage. Indeed, the FZ’s export-ori-
ented growth model, which relied on cheap labor and trade preferences,
was perhaps equipped to deliver jobs but not necessarily able to facilitate
substantial poverty reduction or an evolutionary pattern of upgraded in
the economy. Whether success will continue into the future, given the
evidence of declining competitiveness in recent years, remains to be
seen.
The Dominican Republic’s experience highlights the limitations of FZ
programs that rely on sources of competitiveness that are unlikely to
remain sustainable—specifically, low wages, trade preferences, and fiscal
incentives. Although these all may offer valuable advantage in the short
term, the Dominican Republic (like many countries who have embarked
on export processing zones) failed to build competitiveness in parallel,
through investments in education and skills, and through integration of
FZ firms with the local economy. This chapter discusses briefly the his-
tory and achievements of the FZ program in the Dominican Republic. It
focuses on the challenges that the program faces in light of declining
competitiveness in traditional labor-intensive garment production, the
government and FZ industry’s response, and the gaps in the long-term
approach to these challenges.
Free Zones in the Dominican Republic

Like most countries in the region, the Dominican Republic followed
import substitution policies from the 1960s, including protection of the
domestic market and subsidies for domestic production. The economy
remained highly specialized, based on primary agricultural products (e.g.,
sugar, bananas, and coffee) and mining. The launch of the Dominican
Republic’s first FZ in 1969 was not part of a policy initiative to move
away from imports substitution toward export-oriented diversification, as
was the case in many countries that later adopted SEZs. Rather, it was a
private initiative—led by the Gulf and Western company—in a specific
context (see box 7.2). In any case, this initiative demonstrated that the
Dominican Republic could develop competitive assembly operations
under an FZ regime. In the 1970s, the government followed suit, opening
a public zone in San Pedro de Macoris, with the main objective of gener-
ating employment. The private sector in Santiago—the second-largest
Box 7.2
Gulf and Western Establishes the Dominican Republic’s

First FZ in 1969
The American conglomerate Gulf and Western purchased a sugar plantation and
the Dominican Republic’s largest existing sugar mill—the Central Romana (located
in the town of La Romana in the southeast of the Dominican Republic)—in 1968.
To avoid what they viewed as unsustainable wage demands by the workers in the
mill, the company opened an industrial FZ nearby to provide wage-earning op-
portunities to the wives and families of those workers as well as to absorb labor
that had been shed as part of their modernization of the mill. Gulf and Western
lobbied the government in support of incentives, which were introduced into
Law 299.2 To kick-start the zone, Gulf and Western transferred some of their own
U.S.-based manufacturing subsidiaries into it. A number of U.S. companies fol-
lowed suit, setting up assembly plants in the La Romana Zone.
The results were impressive. Within a short period, the local economy experi-
enced major growth in employment. The towns of San Pedro and Santiago, also
dependent on agricultural products (sugar, coffee, and tobacco) began to lobby
the government to establish their own FZs in the early 1970s. The government
approved both of these requests and the groundwork was laid for the major
expansion of the FZ program by the 1980s.
Source: Derived from Schrank (2008).
city in the Dominican Republic—also joined together to establish an FZ

under the management of a nonprofit association.
But during these initial years, the free zones remained very much
enclaves, from both a physical and a policy perspective. Partly as a
result, growth of zones during the period 1969 to 1983 remained rela-
tively slow. During those years, the four zones generated about 10,000
jobs, primarily in the garment activity. But following the debt crisis in
the early 1980s, the Dominican Republic began to liberalize its econ-
omy and shifted toward the promotion of nontraditional exports.
Along with the growth of the tourism sector, key to this economic
restructuring was the expansion of the free trade zone program. FZ
development accelerated during the second half of the 1980s, as the
country became a favored location for relocating factories (particularly
in the apparel sector) to serve the U.S. market, and FDI rapidly flowed
into the country. This growth was driven by several factors, including
the following:
• Trade preferences: The U.S. CBI introduced in 1984 provided duty-free

access to the United States for about 3,000 products, including
apparel.
• Low wages: Linked to trade preferences, a huge wage arbitrage op-
portunity existed between the United States and Dominican Repub-
lic in the 1980s. Hourly compensation for semiskilled workers in
export-manufacturing sectors in the Dominican Republic was only 6
percent (US$0.79 per hour versus US$13.66 per hour) that of the
United States in 1987 (Kaplinsky 1993). Even at this time, the
Dominican Republic’s wages were three times higher than in “low-
wage Asia,”3 which underscores the critical importance of trade pref-
erences and of FZ incentives in the competitiveness of the Dominican
Republic from the beginning. Special provisions inside the FZs facili-
tated the Dominican Republic’s low-wage competitiveness. Although
the FZ law states that the national labor law applies in FZs (including
the requirement to make Social Security contributions), minimum
wage4 is lower in the FZs and profit-sharing (compulsory in the
domestic market) is not required.
• Competitive exchange rate: A series of devaluations in the early 1980s,
with a sharp devaluation in 1985 (resulting from floating the peso in
relation in the dollar), depressed labor and other operating costs.
• Fiscal incentives: Within the FZ environment, foreign investors could
access generous incentives, including exemptions on corporate income
tax, import duties, value added tax,5 and property taxes. Tax exemp-
tions are valid for a period of 15 years for location in most zones;
a special exemption period of 20 years is offered for developers and
companies in free zones located in provinces on the Haitian border.
Both periods may be extended on a company-by-company basis, upon
petition to Consejo Nacional de Zonas Francas de Exportación or
National Free Zones Council (CNZFE). FZ companies are required to
export at least 80 percent of their production, although this restriction
can be lifted in cases in which the product is not manufactured
domestically and if local inputs account for at least 25 percent of value.
Box 7.3
Profile of the Dominican Republic’s Free Zones in 2010

As of the end of 2009, the Dominican Republic had 55 registered FZ industrial
parks, 47 of which had active companies operating within them. The majority of
these parks are clustered in two locations: outside the main city of Santo Domin-
go on the southern coast and outside the second-largest city, Santiago (de los
Caballeros) in the Cibao Valley in the North-Central region.6 Few zones are located
in the western half of the island, despite the incentives available for establishing
and locating in zones along the Haitian border.
Among the zones there are 31 private parks, 21 public parks, and 3 parks that
are operated as PPPs or through registered charities. Most of the public parks are
run by a government agency, the Center for Industrial Development and Com-
petitiveness (Proindustria).7 Some 456 firms were operating in these parks, and
110 single factory zones are registered across the country. Most of the parks are
relatively small in size—indeed, the vast majority of the parks have a constructed
area that is less than 5 hectares in size, with the largest park (Santiago) construct-
ed on only 35 hectares (and only five other parks with more than 10 hectares).
More than half the parks have less than 5 companies operating within them; only
a handful have more than 10 companies.
A large majority of the companies operating in the FZs originate from the
United States or the Dominican Republic. According to statistics from CNZFE, as
of the end of 2008, 44 percent of zone companies were U.S. owned (and another
3 percent were from Puerto Rico), with 32 percent having domestic ownership.
The next largest investors are from the Republic of Korea (14 firms or 2.7 percent
of the total), Spain (12 firms), and Holland (11 firms).
Source: Authors.
Import duty is payable on all local sales; however, the valuation on

which duty is payable excludes the value of local inputs.
• Strong regulator: The Dominican Republic’s FZ program benefits from
an effective regulator. The CNZFE was established in 1978. It reports
directly to the presidency and is governed by a board of directors, which
gives 50 percent representation and voting power to the private sector.
The FZs became the most dynamic engine of growth in the Dominican
Republic’s economy during the 1980s and 1990s. Between 1985 and
1989, the number of FZs more than tripled, from 6 to 19, the number of
FZ companies rose from 146 to 220, and employment jumped from
36,000 to nearly 100,000. The program continued to expand during the
1990s, helped in part by the government enacting a comprehensive FZ law
and regulations in 1990. By the end of the 1990s, the Dominican Republic
had more than 50 operating industrial parks housing more than 500 com-
panies. In addition, more than 100 single factory zones, known as zonas
francas especiales (ZFEs) have been established since the 1990 law. The
program reached its peak in terms of employment (195,000) in 2000; this
was equivalent to up to 10 percent of the country’s total employment.
In the past decade, however, the zones have faced major challenges
(see figure 7.1) related to competitiveness in the core textile and apparel
Figure 7.1 Index of Growth (1995 = 100) in the Free Zone Program
175
150
125
100
75
50
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
20
20
20
20
20
20
20
20
20
employment firms exports
Source: Authors’ calculations based on data from CNZFE.

sector, which is maturing and no longer a particularly low-cost produc-

tion base for the U.S. market. Declining performance of the apparel sec-
tor began in 2001, with increasing competition from companies
established in Central American FZs, which has gathered pace since the
MFA ended in 2005, and with subsequent competition from Asia.
Employment in the FZs has declined some 35 percent since 2000.
Yet despite this, exports have remained steady, as the result of some
diversification in the FZ program over recent years. Less than one-third
of FZ companies in the Dominican Republic now manufacture textiles
and garments; other key manufacturing now includes shoes, leather
goods, cigars, jewelry, pharmaceutical products, and electronic parts.
Potentially more important has been the limited, but evident, growth
in service activities within the FZs, including trading, call centers, and
data processing.
Since 2009, however, the FZ program has experienced absolute decline
across all sectors. According to the president of the Dominican
Association of Free Zones (ADOZONA), the number of operating firms
will decline to below 500 and more than 8,000 jobs were lost in the FZs
during the first quarter of 2009 alone. The decline in exports is even
steeper, at more than 20 percent annualized. Although this decrease is
driven by the global economic crisis, it highlights more fundamental
competitiveness issues that will remain a major challenge to the sustain-
ability of the program into the future.
Performance and the Challenge of Adjustment

As discussed earlier in this case study, the FZ program in the Dominican
Republic undoubtedly has had a major impact on the growth and
development of the economy since its inception (see figure 7.2). Since
2000, the FZ program has made a contribution of around US$1 billion
in foreign exchange. It has been chiefly responsible for diversifying and
industrializing the economy, has contributed substantially to employ-
ment, and has been the main source of productivity growth in the
economy. On the other hand, on virtually all measures, the FZs pro-
gram is in stagnation or decline, and this is contributing to a significant
slowdown in the Dominican Republic’s overall economy.
The following sections provide a brief summary of performance
and challenges against key measures of investment, exports, and
employment.
Figure 7.2 Free Zone Value Added (US$m) and Contribution to GDP, 1995–2008
1,800 8.0%
1,600 7.0%
1,400
6.0%
1,200
5.0%
1,000
4.0%
800
3.0%
600
400 2.0%
200 1.0%
0 0.0%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
20
20
20
20
20
20
20
20
20
value-added (US$m) contribution to GDP (%-right hand axis)
Source: CNZFE (2009).
Investment. At the end of 2008, accumulated FDI in the FZs was

US$2,611 million, 80 percent of which was made within free zone parks
and 20 percent through single factory zones (called ZFEs in the
Dominican Republic). This was equivalent to about 23 percent of the
total FDI stock in the country at that time (CNZFE 2009). In 2002 and
2003, more than 90 percent of all FDI in the Dominican Republic went
into the FZs (World Bank 2006). By the end of 2008, the main part of
FDI in FZs was concentrated in textiles and garments (33 percent), which
was followed by tobacco (19 percent). In terms of investment source, at
the end of 2008, 46 percent of the FDI stock had its origin in the United
States, followed by 26 percent from the Dominican Republic, 6 percent
from the United Kingdom, and 5 percent each from Canada and Sweden.
Although most of the initial investments in the FZs came from foreign
companies, Dominican Republic domestic investors later became impor-
tant sources of investment, mainly as subcontractors in the apparel sector
as well as developers of industrial parks.
Between 1995 and 2004, the number of FZ industrial parks grew
from 35 to more than 60. The number of companies operating in the
FZs also grew by about 20 percent over this decade, reaching a high of
569 in 2004. After this time, both zones and firms began to decline, with
at least 10 zones (most of them housing only one or two firms) closing
since 2004.
Exports. Exports from the FZ program grew more than 10 percent

annually between 1995 and 2000, reaching nearly US$4.8 billion. The
contribution of the FZ program to total exports in Dominican
Republic is one of the highest anywhere in the world. At its peak in
2001, the FZs accounted for 81 percent of national merchandise
exports.8 FZ exports have been stagnant since that time, however,
actually declining by 2008 to US$4.5 billion. In parallel, the FZ con-
tribution to total national exports has fallen sharply to 65 percent in
2008 (see figure 7.3).
Decomposing the FZ exports to isolate the impact of the all-impor-
tant textile and apparel sector results in a striking picture. As shown in
figure 7.4, which presents the relative growth of textile and nontextile
sector exports from 1995 through 2008, the apparent flat trend in FZ
exports masks a major underlying dichotomy. Textile and apparel
exports began to decline from 2000, and the pace of collapse acceler-
ated sharply after 2004. At the end of 2008, textile exports had declined
33 percent since 1995 and stood at less than half their 2000 peak. For a
sector that was responsible for well over half of all FZ exports over the
Figure 7.3 Free Zone Exports (US$ million) and Share of National Exports
6,000 90%
80%
5,000
70%
4,000 60%
50%
3,000
40%
2,000 30%
20%
1,000
10%
0 0%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
20
20
20
20
20
20
20
20
20
FZ exports (US$m) FZ share of national exports
Source: CNZFE (2009).

Figure 7.4 Index of Free Zone Exports: Textile versus Nontextile (1995 = 100)
300
275
250
225
200
175
150
125
100
75
50
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
20
20
20
20
20
20
20
20
20
exports textile exports nontextile exports
Source: Calculations based on data from CNZFE (2009).
past decade, this represented a massive shock to the program, and the
economy more widely.
Figure 7.5 sets out clearly the level of decline in the Dominican
Republic’s position as a textile and apparel sector exporter to the
United States. The first graph shows that exports of knitwear to the
United States fell by more than half between 2004 and 2008, as
the Dominican Republic was replaced mainly by Asian exporters, as
well as Nicaragua. Although most other producers in the region also
experienced declines, none was as deep as in the Dominican Republic.
The graph on the right suggests that this pattern is deepening through
the recent global crisis. The Dominican Republic not only experienced a
much deeper decline in textiles and apparel exports to the United States
in 2009 than most other countries, but it continued to face declining
exports in 2010, whereas almost all other countries experienced consid-
erable recovery.
The key question is whether the FZ program, which was heavily
reliant on one sector (textiles and garments) and one market (the
United States) can diversify and upgrade itself, in the face of commod-
itization and increasing competition in this sector. Figure 7.4 shows
that nontextile exports have grown rather well, offsetting much of the
decline in textile exports. What also is clear, however, is that the growth
170
Figure 7.5 Comparative Growth in U.S. Imports of Knitwear by Key Countries, 2004–08, and U.S. Imports of Apparel and Textiles
by Key Country, 2009 and 2010
240
30%
220 25%
200 20% 18%
180 13% 13% 14%
160 10%
5%
140
0%
120 0%
100 –2%
–4% –3%
–6%
80 –10% –9%
60
40 –20%
–22%
04
05
06
07
08
20
20
20
20
20 –30% –27%
DR
as
iti
sh
m
China Bangladesh Vietnam
gu
in
Ha
na
ur
de
Ch
ra
nd
et
la
Lesotho El Salvador Nicaragua
ca
Vi
ng
Ho
Ni
Ba
Guatamala Mexico Dominican Republic
Honduras 2009 v 2008 2010 YTD (6/10)
Source: U.S. Office of Textiles and Apparel (http://otexa.ita.doc.gov/msr/catV1.htm).

of nontextile activities may stem from the decline in exports, but it is

doing little to absorb the workforce shed from the garment sector.
Employment. Figure 7.6 illustrates the growth in employment in the

Dominican Republic FZs over the life of the program. Up until the early
1980s, employment was relatively modest. But from then it took off rap-
idly, growing at an average of more than 13 percent annually between
1985 and 2000, when it peaked at close to 200,000. It has since fallen
rapidly, shedding more than 80,000 jobs. At its height, the FZ program
was responsible for 10 percent of total employment in the country and
38 percent of manufacturing sector jobs, but the program has since
declined to account for around 30 percent of total manufacturing
employment.
It is worth noting that the large growth in employment until recent
years came also in parallel with ongoing, robust growth in total factor
productivity (TFP). FZ companies grew TFP 3.4 percent annually between
1975 and 2004, a level which is high by international standards and was
five times greater than the growth achieved by Dominican Republic firms
outside the free zones (World Bank 2006).
Other challenges to the FZ program. In parallel with the problem of

structural adjustment, the FZ program also must cope with an additional
factor that may limit its scope to react to the challenge—compatibility
Figure 7.6 Evolution of FZ Employment, 1969–2008
200,000
180,000
160,000
140,000
number of jobs
120,000
100,000
80,000
60,000
40,000
20,000
0
19 9
19 1
19 3
75
19 7
79
19 1
19 3
19 5
87
19 9
19 1
19 3
19 5
97
20 9
01
20 3
05
07
6
7
7
8
8
8
8
9
9
9
0
19
19
19
19
19
20
20
Source: CNZFE.
with the WTO. The tax exemptions that are at the heart of the FZ regime
are not compatible with the Agreement on Subsidies and Countervailing
Measures (SCM) signed under WTO. In 2002, the Dominican Republic
notified the WTO of the subsidies and requested an extension of the
transition period allowed by the agreement (WTO 2002). In September
2007, the Dominican Republic requested continuation of the extension
relating to Law No. 8-90 (WTO 2007c; also see WTO 2007a, which
contains an updating notification of subsidies under Law No. 8-90), in
accordance with the procedure adopted by the General Council in favor
of certain developing-country members (WTO 2007b). According to this
procedure, the members concerned undertook to eliminate export subsi-
dies by December 31, 2015, at the latest and to submit an action plan for
this purpose in 2010. By amending the FZ Law and abolishing the local
content requirements and restrictions on sales in the domestic market, as
well as the 25 percent export performance requirements on several prod-
ucts, the Dominican Republic authorities believe that Law No. 56-07
represents a step forward in bringing domestic legislation in line with the
SCM. Of course, much remains to be done to bring the program into
compliance.
The Policy Response

The Dominican Republic government has taken some steps to respond to
these challenges. These responses should help, but the balance of initia-
tives taken appear to be designed more to bolster the existing basis of
competitiveness on which the current free zone industry is based, rather
than to address the structural changes that are required. This may not be
surprising, given the strength and organization of the FZ sector and their
effectiveness in lobbying the government.
In an attempt to halt job losses in the FZ sector, the government
offered in 2008 a temporary wage subsidy.9 For the first nine months of
2008, the government offered FZ companies 2,000 pesos per worker per
month (around US$65). This was equivalent to nearly 30 percent of the
average salary of a low-skilled worker in the FZs. For the final three
months of 2008, the subsidy was reduced to 1,200 pesos, after the coun-
try entered into a period of budgetary crisis. The subsidy, however, proved
to be ineffective as companies realized it would be only temporary.
ADOZONA (the sector’s industry association) also has proposed to
amend the FZ Law, introducing two additional incentives: (1) exonerat-
ing all FZ employees from income tax; and (2) exonerating the tax on
dividends of FZ companies. The association also has proposed to reform

the labor code to reduce severance compensation and therefore make
firing much more economical for FZ companies. This measure is, how-
ever, unlikely to be adopted by the Dominican Republic Congress.
FZ companies that produce goods that are not produced by domestic
companies in the Dominican Republic always have been able to sell 100
percent of their production in the domestic market, as long as the domes-
tic value added is at least 25 percent. In recent years, the Dominican
Republic took a number of additional initiatives to promote forward link-
ages. The most important was Law 56-07 (May 2007), which opened up
the domestic market fully (100 percent) to FZ producers of key products,
including textiles, clothing and accessories, hides and skins, and footwear
and leather articles. The purpose of the amendment was to give an extra
incentive to key sectors in which job losses have been heavy in recent
years. Perhaps more important, it also extended the customs and fiscal
benefits of FZs to domestic-based producers in these sectors.10 The
amendment also opened up the possibility of FZ companies that provide
logistical services (e.g., consolidation and storage of goods) to import and
sell goods in the domestic market, subject to authorization by the CNZFE
and payment of the relevant duties. Despite these incentives, sales to the
Dominican Republic remain insignificant for most FZ companies.
Private sector initiatives are attempting to address the challenge of
competitiveness in the apparel sector. As the Dominican Republic bene-
fited from a twin-plant scheme in the early days of its FZ program in the
1970s, some of its major companies now are extending a similar concept
to integrate production with plants in Haiti (see box 7.4). This strategy
combines Haiti’s cheap labor with Dominican Republic assets (political
stability, skilled labor, networks in established markets) and takes advan-
tage of market access programs in the United States that allow cumula-
tive value requirements between beneficiary countries.
Several public and private initiatives are attempting to address long-
term structural upgrades in the FZ sector. For example, in 2009,
ADOZONA managed to build a consensus within the sector and with
the government for the creation of a Fund for the Promotion of Exports
and Investment (Decree 244-09). This special fund was created by a
decree and was intended to include contributions from both the govern-
ment and the private sector. It is supposed to carry out international
investment campaigns to promote investment in the FZ sector. As of
September 2010, however, the corresponding decree has not yet been
adopted, and the government has not budgeted any resources for the
Box 7.4
Grupo M Pioneered the Strategy of Production Sharing

between FZs in the Dominican Republic and Haiti
Grupo M was created in 1986, became a conglomerate in 1993, and during the
1990s grew at around 12–15 percent per year for several years. With more than
14,000 workers, it became the largest apparel conglomerate in the region, with
up to 24 different firms located in the Dominican Republic, Haiti, and the United
States. In the early 2000s, its annual sales averaged US$200 million. It gained the
confidence of some of the best-known brands, such as Polo, Ralph Lauren, Liz
Claiborne, Tommy Hilfiger, Hugo Boss, Banana Republic, Timberland, and Nike.
Grupo M also built joint ventures with main global suppliers of zippers, chemical
producers, and other products, and began producing intermediate products
such as yarn, certain fabrics, and labels. Like all companies in the Dominican
Republic, however, it is struggling to survive in the face of rising competition
from Asia.
In response to this challenge, Grupo M has pioneered the strategy of produc-
tion sharing with Haiti. This strategy, sometimes referred to as “twin-planting,”
“production sharing,” or “coproduction,” involves sending the most labor-intensive
operation (assembly) to Haiti and sending the products back to the Dominican
Republic for finishing (washing and packaging) and export. This is being done in
two factories in Haiti—one for Levi’s jeans and another for Sara Lee T-shirts. Grupo
M takes advantage of lower wages in Haiti and also of its status as an LDC country,
which allows Haitian apparel to enter duty free into the United States, even when
the fabric is not of U.S. origin. The advantage of purchasing fabrics in Asia rather
than the regional market is significant, as the price differential can be as much as
30 percent.
The CODEVI FZ, where these activities are carried out, was created with the
support of the IFC on the border with the Dominican Republic. CODEVI is a private
zone owned and operated by Grupo M. After a number of problems in the start-
ing stages, particularly related to labor difficulties, the project has expanded well
over the past five years. More than 20 hectares of land have been developed, with
more than 25,000 square meters of facilities in operation. Exports of the zone were
expected reach US$120 m in 2009. The company already employs 4,000, and
plans to create 5,000 more jobs in the next five years.
Source: Authors.
fund. ADOZONA is engaged in a campaign with the government with

the objective to develop the “export culture”—specifically, it is aimed at
education and convincing local businesses of the importance of export
markets and export readiness. This activity is carried out under the
umbrella of the recently created Presidential Table for the Promotion of
Exports (Decree 174-09). Unfortunately, here again, in the absence of
decree of application, the first meeting of the table is pending. An agree-
ment between the national investment promotion agency and the
national vocational training institute (INFOTEP) allocates 1 percent of
each park’s payroll for each park’s training needs, which are defined by
the users through the corresponding park association.
Current Situation and Conclusions

As discussed, textile exports, which accounted for about half of exports
value and a greater share of employment, declined by more than
50 percent in the past five years alone. Yet, there is some evidence that
the FZ sector has managed to attract new and competitive industries. In
the past five years, exports of medical equipment and pharmaceuticals
have increased two and a half times and electronics by 50 percent—
these two sectors are now each responsible for almost as many exports
as the textile and garments sector. Similarly, the jewelry and tobacco sec-
tors, which grew at 54 percent and 44 percent over this period, respec-
tively, are increasingly important to the Dominican Republic economy.
The services sector is also becoming an important part of the FZs. The
Dominican Republic’s first call center (employing just 100 workers) was
established only in 2006; by 2009, the sector now employed more than
5,000 employees. In parallel with the growth in these nontraditional sec-
tors, the Dominican Republic has experienced a rapid growth in the value
added share of exports. Although this figure stayed steady between
30 percent and 32 percent throughout the 1980s and 1990s, it began
to rise at the end of the 1990s and neared 50 percent by 2005 (it has
since fallen slightly to 44 percent). Within the textile and apparel sec-
tor, too, there is evidence of upgrading, with large firms like Grupo M
and Bratex having developed full-package operations, including prepro-
duction services and sourcing.
The financial crisis has caused a widespread and steep decline not only
in textiles and apparel but also throughout all FZ manufacturing sectors.
Exports of textiles and apparel declined by more than 25 percent in
2009, and an even faster decline has been experienced in jewelry
(–59 percent) and electronics (–51 percent).11 This suggests that the prob-
lem is not simply one of the MFA phaseout or of the global economic
crisis, but rather a more fundamental problem of competitiveness (and
the limited scale of upgrading in the Dominican Republic’s FZ sector).
The challenges being faced by the Dominican Republic highlight the
classic problems of many export-processing programs worldwide. In addi-
tion to weak infrastructure, particularly the instability and cost of electri-
cal power, the export sector faces structural challenges, including (1) an
overreliance on trade preferences and narrow export markets; (2) poor
linkages with the local economy, which prevent the program from facili-
tating dynamic gains that could contribute to economywide upgrade;
(3) failing to recognize or act on the links between social upgrading and
sustainability of the FZ program. Each of these challenges is summarized
in the following sections.
Overreliance on Trade Preferences

Trade preferences have played a critical role in the development of the
FZ program in the Dominican Republic. In 1984, the Dominican
Republic became beneficiary of the CBI launched by the United States
under the legislation of the CBI-II (Caribbean Basin Economic Recovery
Expansion Act). This initiative granted the Dominican Republic duty-
free access to the United States market for most products until 1990. Ten
years later, in 1994, the United States and Canada signed the NAFTA. To
offer the Caribbean countries similar trade benefits, the Caribbean Basin
Trade Partnership Act offered these countries “textile parity” with NAFTA
partners in 2000. The Dominican Republic also joined the CACM in
1998 by signing bilateral FTAs between each member. In May 2004, the
United States signed CAFTA and, in August, DR-CAFTA, which entered
into force in the Dominican Republic in March 2007. In textiles and gar-
ments, DR-CAFTA expanded the CBI legislation by eliminating duties on
nearly all textiles and garment imports assembled from components
made in DR-CAFTA countries and the United States. The Dominican
Republic has had preferential access to the European market since the
Lomé Convention of 1975 (now under the Cotonou Agreement), and
consolidated in a two-way trade preference scheme in the EPA signed in
2009. Until recently, however, its focus has been almost exclusively on
the U.S. market, a dependency that has been exposed as a significant
vulnerability during the recent crisis.
Although trade preferences clearly have been critical in catalyzing
the Dominican Republic’s FZs, they also can be criticized for having
contributed to complacency, both in terms of market focus and more

broadly in terms of competitiveness. Although the textile and apparel
sector remains relatively highly protected in many markets, the trend
in tariff and quota protection has moved inevitably downward, even
through the crisis. As such, the Dominican Republic’s preferential
advantage in market access continues to erode steadily. The shift in mar-
ket share toward Asian manufacturers following the elimination of quo-
tas at the expiration of the MFA (as shown in figure 7.5) is illustrative
of the declining value of trade preferences in underpinning competitive-
ness in the FZ’s traditional labor-intensive assembly operations. The cost
of productivity gap is now too wide to be closed by the ever-diminishing
scope of these preferences.
Failure to Integrate with the Local Economy

Despite many efforts made over the years, a critical failing of the
Dominican Republic FZ program has been its inability to forge effective
links between the FZ sector and the rest of the economy. This has been
one of the main factors inhibiting the FZs from diversifying and upgrad-
ing. In terms of forward linkages, the FZ legislation is fairly conducive to
supporting integration with the local market. FZ companies always have
been free to export up to 20 percent of their production to the Dominican
Republic domestic territory, provided they pay all relevant tariffs and
taxes that imports from other countries incur. In addition, the import
duty assessment on these exports does not take into account the value of
any domestic components used and other value added (e.g., through
labor, utilities, etc.). In 2008, however, only 12 FZ companies sold into the
Dominican Republic market, making the Dominican Republic only the
13th most important market for FZ companies.12
The legislation is relatively favorable to supporting backward integra-
tion of FZs into the local economy. Suppliers from the domestic economy
to FZ companies are exempt from import duties on the raw materials
used in this production. This allows them to at least be on equal footing
with competitors supplying the zones from outside the Dominican
Republic. From the early days of the program, however, it was apparent
that FZ companies imported virtually all their manufacturing inputs. The
U.S. trade preference program for the apparel industry was designed to
ensure that key inputs were sourced from the United States. Even after
the CBI in 2000, which allowed apparel producers to use inputs from all
countries within the Caribbean, linkages have remained low (even at a
regional level). The lack of supply links went beyond textiles and
extended to capital equipment and even basic packaging materials. In the

apparel sector, local spending (encompassing material inputs, capital
equipment, water, electricity, and statutory payments of Social Security
and training) in the early 2000s accounted for only 1.5 percent of the
export value of FZ companies (Sanchez-Ancochea 2006).
The Dominican Republic government, with the support of the U.S.
Agency for International Development, set up a program in the 1990s to
develop backward linkages with EPZs. Feasibility studies revealed abun-
dant EPZ demand for textiles, precision plastic parts, metal stamping,
machine shops, and tool, mold and die making. The program also revealed
the main reasons why backward linkages failed to develop, including the
following: (1) the capital or intermediate goods required by FZ producers
frequently did not exist in the Dominican Republic; (2) some local
manufacturers who did produce the goods required frequently had little
interest in supplying FZs because they were satisfied with current opera-
tions and profitability levels of a protected local market; and, most impor-
tant, (3) local producers generally failed to meet market standards for
price, quality, and delivery terms. With the benefits of duty-free import
and relatively low transport costs in and out of the Dominican Republic,
FZ companies generally have little incentive to purchase local inputs.
In the absence of these linkages, however, FZ operators are losing out
on significant potential to benefit from the development of dynamic local
clusters of suppliers, customers, and supporting services. In successful FZ
programs—for example, Malaysia and the Republic of Korea—the devel-
opment of strong local clusters is acknowledged as making a significant
contribution to the successful upgrading of FZ-based manufacturers by
giving them access to competitively priced, world-class quality inputs.
Lack of Attention to Skills Development and Wider Social Upgrading

The FZs have been criticized for not having contributed significantly to
the upgrading of the workforce, relying instead on low-skilled, low-wage
workers, with little interest or incentive to move these workers upward.
Although the FZ law states that the national labor law applies in FZs
(including the requirement to make Social Security contributions), it
does make some special provisions for wages in the zones. Specifically,
minimum wage is lower in the FZs and profit-sharing (compulsory in the
domestic market) is not required. In practice, wages in the FZs are, on
average, significantly above the minimum wage: the average wage in
2008 for a laborer was around Dominican peso (RD$)7,000 monthly
while the minimum wage was RD$4,900. However, wages in the FZs are
consistently lower than for the Dominican Republic economy overall—

more than 15 percent for male workers and more than 20 percent for
female workers (World Bank 2006). This is, however, likely driven mainly
by the low-skilled, labor-intensive nature of work in the FZs relative to
the overall economy. In addition, for unskilled workers, real wages (in U.S.
dollars) in the FZs has been largely stagnant over the past 15 years.
The FZ program does have close links with INFOTEP, and a formal
training program is available for workers at FZ companies. According to
data from CNZFE, in 2008, 25,555 workers were enrolled in INFOTEP
training programs—this is equivalent to about 20 percent of all workers.
The training is relatively limited in scope, however, and the average train-
ing time per participant was less than one hour.
Some of the blame for the poor skills development can be attributed
to the FZ enterprises (and is linked to the issue of poor integration),
although much of this failure derives from the wider policies of the
Dominican Republic government, particularly its failure to invest in
social spending (including education). In fact, the Dominican Republic
has long had one of the lowest levels of government social spending in
Latin America—for example in 2001, social spending was 7.6 percent of
GDP in the Dominican Republic, in comparison to Costa Rica, which by
that time had contributed 20 percent of its GDP toward social spending
for several decades (Sanchez-Ancochea 2006).
Despite the skills problems, evidence from the structure of the FZ
workforce suggests that there has been some relatively significant struc-
tural upgrading over the past decade. The share of skilled workers (tech-
nicians) rose from only 7 percent of the FZ workforce in 1998 to
12 percent in 2008. Meanwhile, the share of unskilled workers declined
from 90 percent to 81 percent. Whether this change reflects active
upskilling within the existing workforce or merely reflects the structural
change of industries within the FZs (or more specifically, the decline in
textiles) is unclear. Whatever the case, what is clear is that demand for
skilled labor continues to rise in the FZs, even while unskilled labor has
collapsed (down more than 40 percent in the past decade).
The role of the FZs as a significant source of job creation is likely to
be limited in the future. Certainly, the traditional FZ strategy based pri-
marily on proximity to the U.S. market, strong fiscal incentives, and
cheap, low-skilled labor is proving to be unsustainable. Only the compa-
nies that build competitiveness on product quality and innovation are
likely to remain competitive in the FZ sector in the years ahead. Achieving
this competitiveness will require greater attention—by FZ firms, the FZ
sector, and the government—to upgrading the skills and technology base
of the country and to developing more sustainable sources of competitive
advantage.
Notes
1. Exports from Costa Rica, whose wages are higher than those in the
Dominican Republic, declined by an even more rapid 38 percent during this
period.
2. This law, however, was not designed specifically to support the Gulf and
Western investment. Rather, the law was really an import-substitution
vehicle—it did not specifically define an FZ regime, rather it established the
zero tax incentive package for companies who exported at least 80 percent of
their production.
3. Average of Thailand, Sri Lanka, Philippines, China (World Bank 1988, cited
in Kaplinsky 1993).
4. Most studies, however, have found that wages in the zones are, on average,
well above the national minimum wage, particularly when overtime and pro-
ductivity bonuses are included.
5. Value added tax known as Impuesto de Transferencia a los Bienes in the
Dominican Republic.
6. The area around Santiago is the most important agricultural region in the
Dominican Republic. The city has developed a major services economy,
which is critical to provide the business services and support required by
manufacturers in the free zones.
7. Two public parks that were created by the Consejo Estatal del Azucar (the
state-owned sugar corporation) were transferred to a publicly owned bank,
Banco de Reservas, under whose ownership they remain. The rest of the public
parks are under the responsibility of Proindustria.
8. This excludes receipts from tourism.
9. See Decree No. 552-07, creating the Employment Protection and Creation
Fund with the aim of preventing job losses in free zones, of October 8,
2007.
10. Including duty-free imports and exemption from corporate and value-added
taxes.
11. Data on apparel and electronics are from the first half of 2009 only.
12. By contrast, 366 companies sold to the United States, 45 to Puerto Rico,
44 to Spain, 36 to Germany, and 27 to Haiti (CNZFE 2009).
References
CNZFE (Consejo Nacional de Zonas Francas de Exportación). 2009. Available at
http://www.cnzfe.gob.do (accessed December 2009).
Kaplinsky, R. 1993. “Export Processing Zones in the Dominican Republic:
Transforming Manufactures into Commodities.” World Development 21 (11):
1851–65.
Sanchez-Ancochea, D. 2006. “Development Trajectories and New Comparative
Advantages: Cost Rica and the Dominican Republic under Globalization.”
World Development 34 (6): 996–1015.
Schrank, A. 2008. “Export Processing Zones in the Dominican Republic: Schools
or Stopgaps?” World Development 36 (8): 1381–97.
U.S. Office of Textiles and Apparel. 2009. Major Shippers Report. Available at
http://otexa.ita.doc.gov (accessed December 2009).
World Bank. 2006. “Dominican Republic Country Economic Memorandum: The
Foundations of Growth and Competitiveness,” September. World Bank,
Washington, DC.
WTO (World Trade Organization). 2002. Document G/SCM/N/74/DOM,
January 8.
WTO. 2007a. Document G/SCM/N/160/DOM, July 5.
WTO. 2007b. Document WT/L/691, July 31.
WTO. 2007c. Document G/SCM/N/163/DOM, September 14.
CHAPTER 8
Fostering Innovation in Developing

Economies through SEZs
Justine White
Introduction
Recognition is growing that technological innovation is central to eco-
nomic growth and development both in high-income and developing
countries (Aghion and Howitt 1998; Fagerberg, Srholec, and Verspagen
2009). Innovation should be understood as the implementation of new or
improved products, processes, marketing, or organizational methods in
business practices and workplace organization (OECD 2005). Importantly
for developing countries, “new” is meant in a relative sense, insofar as
innovation can be as much about applying existing global technologies
that are new to the local context or bringing small improvements to exist-
ing technologies (incremental innovation) as it is about the creation of
“new-to-the-world” innovations (radical innovations).
Against this backdrop, FDI, trade, and innovation are likely to be
closely intertwined and mutually beneficial for development. Indeed,
trade and FDI represent an opportunity for less developed economies to
access high(er) technology goods and services, as well as to become famil-
iar with innovative processes and demanding markets.
Since the 1990s, economic globalization (Bhagwati 2004) and, in
particular, the lowering of transportation costs and the fragmentation of
the production chain (Friedman 2005; Porter 1990; Saxenian 1999) have
183
increased the opportunities for developing countries to receive FDI and

increase trade. In parallel, the use of SEZs as a policy tool to attract FDI
and promote trade has expanded rapidly, particularly in developing
countries. The examples of some countries in East Asia have forcefully
demonstrated the catalytic role that SEZs can play in diffusing technolo-
gies and stimulating innovation in the domestic economy, and in
facilitating opportunities to climb up the value added chain. However,
the failure of many SEZ programs in the developing world to go beyond
basic, low-wage assembly activities suggests that the basic instrument of
SEZs alone may not be sufficient to foster innovation. Beyond the core
role of SEZs in fostering openness to trade and investment, further con-
ditions are required, and these most likely extend beyond the spatial
confines of the SEZs and into the wider domestic economy.
This chapter explores the possible preconditions and policy recommen-
dations required for SEZs to support innovation in developing countries.
First, it highlights the channels through which SEZs may positively influ-
ence innovation. Second, it underlines some policy initiatives and capabili-
ties that seem to strongly condition the development of innovation through
SEZs. Third, it advocates a step-by-step approach in designing SEZs, build-
ing on the example of successful experience in East Asian countries.
SEZs as an Instrument for Innovation

In developing countries, SEZs often are associated with low wages and
low-skill production capabilities that typically are set up to build on the
comparative advantage of cheap labor to expand the export base.
Experience shows, however, that in addition to the direct economic ben-
efits that can be derived from boosting trade, including employment
generation and increasing exports, SEZs also can carry indirect economic
benefits, which in turn can drive local innovation. Indeed, while attracting
“content-rich” FDI and stimulating trade, SEZs tend to favor the acquisi-
tion of international knowledge and know-how, which are crucial to the
development of innovation capabilities. Furthermore, the local interac-
tions set in motion by SEZs appear particularly well-suited to innovation,
which greatly benefits from local-level interactions.
In Addition to Boosting National Accounts, Foreign Investment, and

Trade, SEZs Can Have More General Benefits for Development
From a host country’s perspective, the benefits of SEZs can fall into two
categories: (1) direct benefits, which straightforwardly and quantitatively
Fostering Innovation in Developing Economies through SEZs 185
affect current account and public finance developments, via export

growth and foreign exchange earnings, FDI, and increased government
revenue; and (2) indirect, or dynamic, benefits, which include skills
upgrading of workforce and management, technology transfer, backward
linkages with domestic firms, demonstration effect, export diversification,
and knowledge of international markets. These effects are listed in
table 8.1. The majority of these indirect benefits may crucially nurture
ingredients that are needed for innovation in the context of development
or economic catching-up.
According to modern innovation systems theory, innovation and
technology development at the aggregate level are essentially the
result of an interactive process involving a set of actors and institu-
tions at the micro level, whose activities and interactions initiate,
import, modify, and diffuse knowledge and new technologies (Freeman
1987). The key ingredients in this process include firms, human capi-
tal (thus skills), and technology or new knowledge, all of which can be
stimulated by SEZ-linked interactions In this respect, successful SEZs
are those that prove able to sustain development in the medium to
long term while influencing production processes throughout the
whole economy, beyond the positive impact derived from direct trade
benefits (box 8.1).
Table 8.1 Direct and Indirect Benefits of SEZs

Direct benefits Indirect benefits
Balance of payments
– Foreign exchange earnings
– Export growth
– FDI
Public finance
– Government revenue
Organizational benefits
– Testing field for wider economic reform
– Demonstration effect
– Export diversification
Technological capabilities and know-how
– Skills upgrading
– Technology transfer
– Enhancing trade efficiency of domestic firms
Source: Author.
Note: FDI = foreign direct investment.
Box 8.1
The First Modern SEZ, Shannon, Ireland

Shannon, Ireland, as the most Western point in Europe, had been the necessary
airport stop for American-bound planes since the start of commercial trans-
Atlantic aviation. At the end of the 1950s, with the technological developments
of the jet engine, Shannon airport was to be removed, in less than a year, from
the schedules of many of the airline companies landing there: a likely devastat-
ing blow for the local economy. The foundations for the first modern SEZ were
laid with a great sense of urgency.
This crisis led to the creation of both the SEZ and a related managing
company, SFADCo (Shannon Free Airport Development Company). SFADCo’s
legal framework gave it considerable freedom of action, and under its terms of
reference, the company’s mandate was wide enough that it was to contribute
to the development of Shannon and its region. Indeed, SFADCo achieved
considerable notice in the early days as a developer of tourist sites with the aim
of attracting tourists to replace the decline in transit passengers. This included
restoration of castles and the popular “rent an Irish cottage” program.
SEZ development was from the outset based on airport-related services,
such as repairing and maintaining aircraft, as well as manufacturing, industry,
and trading operations, which contributed to the use or development of the
airport. Although many of the first operations failed, some emblematic efforts
were a great success. The importance at this time was the demonstra-
tion effect.
In the following decades, the continued success of the SEZ was ensured by
(1) a highly integrated and coordinated approach to development; (2) focus on
learning: direct training programs were provided by SFADCo for industry, and
skills learned in factories at Shannon flowed subsequently to Irish industry—
also, and important for future orientations (such as the set-up of the National
Technology Park), partnerships were set up with a specially established univer-
sity (University of Limerick); (3) trial and error was the norm in setting up new
industries and companies, underlining a typically pragmatic approach; and (4) a
rapid harmonious social and cultural change at the local level. Thanks to the
partnership with the University of Limerick, the SEZ also supports the National
Technology Park. Shannon continues to attract investors, more than 50 years
after its foundation.
Source: Callanan (2000).
Trade and FDI Flows Attracted by SEZs Constitute Major

Channels for Tapping into Global Knowledge and Know-How
Much of the economic and social progress of the past few centuries has
been due to, or is associated with, technological innovation. As measured
by TFP, the latter factor explains much of the differences in both the level
and growth rate of income across countries (Easterly and Levine 2001;
GEP 2008). In this regard, one of the problems faced by most developing
countries is their inability to generate radical, new-to-the-world innova-
tions. Overall, most of the world’s commercial technology and R&D
remains highly concentrated in a small number of countries (France,
Germany, Japan, the United Kingdom, and the United States), although
the nonmember countries of the Organisation for Economic Co-operation
and Development’s (OECD) share of the world’s R&D has been increas-
ing rapidly (OECD 2010). Furthermore, a large share of the world’s com-
mercial technology is produced by MNCs, most of which are headquartered
in these same high-income countries.
Given the shortage of advanced technological competencies in devel-
oping countries, the vast majority of technological progress needs to occur
through the adoption and adaptation of preexisting but new-to-the-
domestic-market technologies. In this respect, as an effective policy tool
to attract FDI and boost trade, SEZs may dramatically increase developing
countries’ exposure to foreign technologies, know-how, and knowledge.
The main transmission channels of foreign knowledge and technology
are trade (imports and exports), the acquisition of foreign technology
licenses, and FDI.
• Imports of goods and services that include embodied technology, and in

particular capital equipment (Coe, Helpman, and Hoffmaister 1997),
can be important conduits for the international transfer of technology
and diffusion of innovation. The role of capital goods in particular has
been supported by a number of empirical studies (Eaton and Kortum
2001; Keller 2004), as well as many case studies (Chandra 2006).
• Export contacts, notably with more developed countries, which may

include forced adoption of higher standards and new specifications, con-
tact with more demanding consumers, and exposure to new ideas, can
constitute a “learning by exporting” effect that may drive domestic
innovation. Although empirical studies are ambiguous as to the existence
of this effect,1 a wealth of anecdotal evidence addresses the topic.
• Acquisition of technology licenses grants a licensee the right to utilize

specific technologies, patents, software, know-how, or product designs
to produce them commercially. Licensing enables the rapid acquisi-
tion of product and process know-how, also allowing local adaptation
and modification. Some studies have found that patent purchases
can be more effective than R&D to increase productivity, particularly
in developing countries with low R&D productivity, but licensing
requires a significant level of technological capability. Interestingly,
about three-fourths of the registered payments to the United States
for technology sales in 2005 were made by foreign affiliates of U.S.
firms (OECD 2009).
• FDI is a major source of process technology and learning by doing

opportunities for individuals in developing countries. Over the last
15 years, FDI inflows to developing countries have almost doubled
as a percentage of GDP. At the same time, the competition, stan-
dards, and knowledge of foreign markets that foreign firms bring to
the domestic market can have important spillover effects. Spillovers
refer here to technology “leakages” from MNCs to local firms in the
same industry. Such so-called horizontal spillovers can take place in
a number of ways: (1) local firms may be able to learn by observing
and imitating; (2) employees may leave MNCs to join local firms,
bringing along new technology and management know-how; and
(3) MNCs may provide public knowledge and know-how that also
can be enjoyed by domestic firms.
The Localized Nature of Innovation Highlights the

Importance of SEZs
The fact that innovation tends to be spatially polarized is not new: see
Alfred Marshall’s “industrial districts” at the end of the nineteenth century;
Joseph Schumpeter’s “innovation clusters”; Eric Dahmen’s “development
blocks” and Francois Perroux’s “development and growth poles” in the
1950s; and, more recently, economic geographers’ and economists’ indus-
trial and high-technology agglomerations and “new economic geography.”
Indeed, research suggests that face-to-face interactions and the constitu-
tion of a local community of researchers and entrepreneurs are crucial to
the transmission of knowledge and the developments of innovative activi-
ties (Storper and Manville 2006). This local dimension of innovation is
explicitly taken into account by current innovation policies, which lay
increasing emphasis on the creation of “clusters” or “science parks.”
Against this backdrop, although in theory the benefits derived from

FDI and trade can be obtained at any location in the country, the fact that
they may be concentrated in a single geographic location, as is typically
the case in SEZs, can be strongly beneficial for innovation. Indeed, the
concentration, proximity, and density (Florida and Gates 2001) offered
by SEZs, all the more if located close to a city or urban area, may be
crucial to facilitate the exchange of knowledge and technologies between
people and firms. Overall, in boosting knowledge acquisition from abroad
and enabling exchanges between people and firms at the local level, SEZs
may constitute an important tool for the development of innovative
capacities in developing countries.
The Need for Absorptive Capacity and Local Linkages

By tapping into global knowledge and plugging into the local economy,
SEZs can be expected to efficiently foster innovation. Observation sug-
gests, however, that the indirect benefits highlighted above have only
been fully exploited in a few, mainly East Asian, SEZs. In the majority of
cases, the beneficial impact of SEZs seems to have been restricted to their
direct impact on trade flows, and most SEZs never get beyond the basic
assembly-type manufacturing activities. In this respect, the success of
SEZs in stimulating innovation and encouraging technology transfer
appears to depend on the following conditions and features of the domes-
tic economy: (1) domestic technological capabilities, both of firms and of
individuals; (2) the partial integration of the SEZs in the local economy
(Johansson and Nilsson 1997; Omar and Stoever 2008), and (3) a strate-
gic geographic location for the SEZs.
Increasing Domestic Technological Capabilities

As an extensive empirical and academic literature points out, openness to
trade seems to constitute a necessary but not a sufficient condition to
bolster local innovation in developing countries. Indeed, even if knowl-
edge and technology are likely to be transmitted through trade and FDI,
national technological capabilities have been identified as important con-
ditions without which knowledge is not effectively absorbed and used
domestically. These concepts have been developed by Abramowitz
(1994), Kim (1980), and Lall (1992), as well as more recently in Fagerberg,
Srholec, and Verspagen (2009).
“Technological capabilities” refer to the ability to develop, search for,
absorb, and exploit knowledge commercially (see, notably, Fagerberg,
Srholec, and Verspagen 2009). These capabilities generally are thought to

cover (1) the skill level in the economy, including not only general educa-
tion but also managerial and technical competences; (2) national research
and development efforts and technical personnel working in their fields;
and (3) the ability of firms to finance their innovative endeavors.
• Training the SEZ workforce on the job and, in parallel, upgrading the
national education system can have important benefits for the overall
skill level.
• A strong point of many of the more successful SEZs was this concomi-
tant development of an increasingly well-trained SEZ workforce, most
often accompanied by major efforts involving the national education
system. In 1968, for example, 57 percent of the SEZ workforce in
Taiwan had only elementary school training. In 1990, 87 percent had
more than elementary training. In the 1970s in the Republic of Korea,
80 percent of the workforce had completed middle school. This pro-
portion was 95 percent in 1990. In terms of gender, these figures are
even more dramatic. In the 1970s, only 20 percent of women working
in SEZs in the Republic of Korea had completed high school, as com-
pared with more than 95 percent today. Table 8.2 gives examples of
on-the-job training provided in some SEZs.
Other initiatives include giving training to local companies outside

the SEZs. For example, SFADCo in Ireland provided direct training for
local industry outside the SEZs during the early 1960s (Callanan 2000).
China, among others, has been more encouraging of joint ventures than
inward FDI in its desire to maximize knowledge and technology transfer
to local agents (Hoekman and Javorcik 2006). It seems, however, that
China’s experience may rest on stronger bargaining power of a large
economy (Wei 2000). As a consequence of training efforts, a locally
high-skilled workforce will be more likely to attract high-technology
investments.
In addition to the formal education system and on-the-job training,
domestic R&D capacity and technical personnel are important in deter-
mining an economy’s capacity to absorb technologies from abroad.
Gradual buildup of R&D capacity facilitates the imitation and adapta-
tion of foreign technologies and improves the extent to which positive
spillovers from FDI and trade accrue to the rest of the economy
(Fagerberg 1988). Indeed, a stock of researchers or technical personnel is
often necessary to understand and evaluate technology, and the higher
Table 8.2 Training for Workers in SEZs

Country Training provided
China (Shenzhen) Three months of on-the-job training for operators (one month for
class and two months for production practice); more than 80 adult
education institutes (1990) but weak links between needs of
enterprises in the EPZ and skills provided.
Republic of Korea Three months of on-the-job training for operators; overseas training
(Masan) for skilled workers (mainly in Japan).
Malaysia Three months of on-the-job training for operators; Quality Control
Cycles with monetary and other incentives (gifts, medals and com-
mendation letters, etc.) for identifying problems and suggesting
ways of solving them); little training for computer programming,
technical engineering, and design work.
Mauritius Three months of on-the-job training for operators (trainee status:
75 percent minimum salary); lack of trained intermediate workers.
Philippines One day to a few weeks of on-the-job training for operators; some
firms (Japanese) rotate operators to make them familiar with
between 10 and 18 interrelated tasks (three-month rotation).
Sri Lanka One to three months of on-the-job training for operators.
Taiwan, China Three months of on-the-job training for operators; cooperative
(Kaohsiung) training programs between school/college and the firm in the EPZ.
School/college provides the general education and the firms
provide special technology training; some overseas training.
Thailand Three months of on-the-job training for operators; off-the-job
(Lat Krabang) training; study and experiment in the classroom and laboratory for
some workers; overseas training (at parent company) for core
employees in management and technology.
Source: Kusago and Tzannatos (1998).
and more sophisticated the technology, the greater specialization and

sophistication needed by researchers. The Republic Korea is an interest-
ing case in this respect, having started with a very low R&D level, which
gradually was built up as the country developed, moving from imitation
and low value-added manufacturing to high value-added products (see
figure 8.1).
Interacting with the Domestic Economy

Many SEZs have remained islands isolated from their host economy, and
in consequence, have not played the catalytic role in stimulating innova-
tion played by many of the more successful SEZs. Remaining an island
does not imply that the SEZs have not succeeded on some counts: they
192
Figure 8.1 The Republic of Korea’s Gradual Buildup of R&D Capacity
100 3 wig textile automobile semiconductor
90 private share, %
2.5 80% HCI Product
80
semiconductor,
70 mobile phone, DTV,
GERD/GDP, % 2 display, automobile,
60 (right axis) ship-building, etc.
50%
50 1.5
government share, %
40
1
30
light
20
0.5 industry
14% product
10
0 0 6% agricultural
product
64
66
68
70
72
74
76
78
80
82
19 4
86
88
90
92
94
96
98
00
02
04
1960 1970 1980 1990 2000
8
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Source: Chung (2010).

Note: DIV = ; GERD =; GDP = gross domestic product; HCI = human capital intensive.
often have generated much-needed employment at the local level and

have succeeded in attracting FDI and foreign exchange. They have not
been able to use this success to stimulate local enterprise upgrading.
Gradual interaction of the SEZs with domestic firms, notably through
backward linkages and labor circulation, can increase a domestic firm’s
capabilities to compete, if the business climate outside the SEZs is gradu-
ally reformed.
Facilitating backward linkages. Getting SEZs firms to source materials

locally—so-called backward linkages—is beneficial to the local economy
in terms of increased output and employment and improved production
efficiency, technological and managerial capabilities, and market diversi-
fication. Lall (1980) notes that such linkages can take several forms. An
MNC physically located within an SEZ may help prospective suppliers
outside the SEZs set up production capacities, provide technical assis-
tance and information to raise the quality of suppliers’ products, or
provide training and help in management and organization (UNCTAD
2001). SEZ companies may want to link to local suppliers for multiple
reasons, among which are to achieve lower production costs, increase
specialization, and better adapt technologies and products to local
environments.
Although these linkages can be extremely important, the onus of
developing them should not be on the firms inside the SEZs. Experience
shows that, when this has been the case, it has not succeeded (see
box 8.2). Furthermore, imposing local content and other burdensome
requirements is often impracticable because of intense competition
between SEZs (FIAS 2008). Host governments, however, can create
attractive conditions, facilitate contacts, and provide various direct or
indirect incentives that make it cost-effective for foreign companies in
SEZs to get supplies from local sources. The Republic of Korea’s
outsourcing program is one example and, in Shenzhen, SEZ adminis-
trators provided individually tailored directories listing prospective
domestic suppliers.
Several authors contend that the ease of setting up backward linkages
is constrained either by prevalent local industrial development (FIAS
2008; ILO 1998) or by sectoral specialization. Jenkins, Esquivel, and
Felipe Larrain (1998) provide a statistically significant econometric link
between backward linkages and the country’s level of industrialization,
although the causality of this link is not demonstrated (Omar and Stoever
2008).2 In terms of sectoral favoritism, it often is argued that some
Box 8.2
The Development of Backward Linkages:

A Successful and Less Successful Example
The Republic of Korea: When the Masan Zone began operations in 1971, domes-
tic firms supplied just 3.3 percent of materials and intermediate goods to firms in
the zone. Four years later, they supplied 25 percent and, eventually, 44 percent.
Consequently, domestic value added increased steadily from 28 percent in 1971
to 52 percent in 1979. In all, the evidence indicates that the Korean government
successfully encouraged backward linkages with local industries and subcontrac-
tors. Local companies supplying EPZ firms had preferential access to intermediate
and raw materials. The zone administration also provided technical assistance to
subcontracting firms.
Dominican Republic: During the 1980s, the share of domestic value added in
total output decreased. In the early 1980s, it was between 40 and 45 percent, but
toward the end of the decade, it was just 25 to 30 percent. There were few back-
ward linkages between domestic firms and industries in SEZs. One reason was the
lack of government interest and incentives. Until 1993, to sell products to firms in
these zones, domestic firms needed an export license, which was difficult to
obtain. In addition, even though the legislation stated that firms could recover
import duties paid for materials used in products sold to EPZ firms, in practice they
were almost never able to do so. The Dominican industrial sector’s lack of com-
petitiveness with respect to quality, timing of delivery, and price also contributed
to the absence of linkages.
Source: Author, based on Jenkins, Esquivel, and Felipe Larrain (1998).
sectors are more receptive to the development of backward linkages than

others. Some authors explain that, because of the very nature of manu-
facturing, the electronics industry should generate more linkages with the
domestic economy. Others contend that linkages are difficult to establish
in any industry, but particularly in the textile industry (Basile and
Germidis 1984; ILO 1998). The accumulated experience of some coun-
tries could support these assertions. However, many of the most success-
ful SEZs initially attracted labor-intensive industries with relatively
unsophisticated technologies (in textiles and electronics), which required
unskilled workers, and then upgraded to more technology-intensive and
higher value added sectors. These successful SEZs proved extremely good
at moving away from the low-skilled, labor-intensive industries of their
first years of operation. New garment industries were not allowed in
Taiwan, China’s EPZ as of 1974, for example.
Enhancing labor circulation. The literature has paid little attention to

the role of labor turnover from SEZs as a channel for the diffusion of
technology and processes to the domestic economy. It seems, however,
that labor turnover can be significant for transferring technology and
managerial know-how to domestic firms. For this reason, some countries
(see box 8.3) have used fixed-term nonrenewable two- to five-year
contracts for local managers in SEZs. Furthermore, because of a strict
labor policy as well as voluntary departure, many employees left SEZs to
create rival firms.
Reforming the business climate. Improving the general business climate

of the host country is essential for developing a catalyst SEZ (FIAS 2008).
Indeed, SEZs’ medium- to long-term viability and their capacity to
Box 8.3
SEZs and Labor Circulation: A “Domestic Diaspora”?

In the Masan Zone in the Republic of Korea, an estimated 3,000 to 4,000 people
received specialized training, either in the zone or abroad (mainly Japan), and half
of these employees eventually left the zone to work in local electronic firms.
In Taiwan, China, under government guidance, personnel from firms in the
zones were placed at potential suppliers’ factories to offer advice on production
methods and quality control.
Shannon, Ireland, had high labor turnover between the SEZs and the domes-
tic economy, with many managers leaving to create competing firms outside
the SEZs.
In Shenzhen, China, workers were appointed by the government for a three-
year term and then were required to leave the zone. Many managers subsequent-
ly started their own firms, capitalizing on experience gained in the SEZs. This put
competitive pressure on firms within the SEZs to innovate or disappear.
Sources: Callanan (2000); Jenkins, Esquivel, and Felipe Larrain (1998); Leong (2007).
stimulate local dynamics appear to require domestic business reforms

when the SEZs is designed or shortly afterward.3 This ensures that entre-
preneurs can set up firms outside the SEZs to collaborate or compete
with SEZs companies. Improving the business climate means improving
the quality of regulation on such topics as starting a business, dealing with
construction permits, employing workers, registering property, getting
credit, protecting investors, paying taxes, trading across borders, enforcing
contracts, and closing a business (World Bank 2010) (see box 8.4).
The example of Shenzhen offers interesting insights into the techno-
logical upgrading of SEZs and the stimulation of innovation in the
domestic economy. After testing business climate reforms in the SEZs,
the Chinese government launched nationwide reforms to match or emu-
late the business climate tested within the zone. Exports from the SEZs
to the domestic economy were authorized.
The Importance of Strategic Location

Many governments have established SEZs in rural areas, responding to
the need to create employment and economic opportunities in these
areas. These SEZs, however, have often failed to become catalysts for
innovation and technological upgrading.
Box 8.4
A Tale of Two Countries: Investment Climate Reform

India’s Kandla, the first SEZ in Asia, was set up in 1965, and the first SEZ in China
was set up in 1980. Being the first mover gave little advantage to Kandla, however,
and China’s SEZs, particularly Shenzhen, have been a phenomenal success.
One major difference between the early Indian and Chinese SEZs is that India
had heavily protectionist policies and its share of world trade slipped from 2 per-
cent in the 1950s to less than 0.5 percent in the 1980s. In contrast, China’s SEZs
were test beds for implementing wide-ranging economic reforms and trade
liberalization in the rest of the country. Thus, SEZs in India remained isolated
enclaves, whereas SEZs in China were rapidly overtaken and threatened by
domestic competitive firms and, to remain relevant, they had to become more
technology intensive, become more business friendly, and offer better services
to firms.
Source: Leong (2007).
Several studies (FIAS 2008; Wei 2000) have insisted on the impor-
tance of the geographic location of the SEZs. Indeed, an SEZ in a city or
periurban area has easier access to firms, capital, and skilled labor and
can integrate with other firms more easily. For example, while the
maquiladoras traditionally have purchased no more than 3 percent of
their overall material inputs from Mexican sources, the maquiladoras of
Mexico’s three largest metropolitan centers, Mexico City, Guadalajara,
and Monterrey, procured 31 percent, 16 percent, and 10.5 percent,
respectively, of their inputs from domestic sources (MacLachlan and
Aguilar 1998).
Also, the geographical proximity to a city or rapidly developing region
has proven important for SEZs to support innovation activities in East
Asia: In China, these include Shenzhen (next to Hong Kong, China),
Zhuhai (next to Macau SAR, China), Xiamen and Shantou (across the
Taiwan Strait opposite Taiwan, China), and Pudong (next to Shanghai).
In the Republic of Korea, these include Masan (next to Masan port, not
far from Busan). In Taiwan, China, these include Nanzih (next to
Kaohsiung) and Taichung (next to Chuanghua).
Overall, the success of SEZs in fostering innovation in developing
countries seems crucially determined by the absorption capabilities of
the domestic economy. This pleads the case for encompassing targeted
innovation policies, aimed at creating optimal conditions to domestically
accompany openness to trade and FDI.
A Staged Approach to Building an Innovative SEZ

Domestic technological capabilities and linkages with domestic firms take
significant time and effort to build up (Fagerberg, Srholec, and Verspagen
2009). In a context of scarce resources, these often require careful priori-
tization. Based on examples from some of the most successful Asian cases,
most notably Shenzhen, this section advocates a step-by-step strategy for
setting up an SEZ and highlights accompanying policy measures aimed at
gradually building up technological capabilities and opening up and link-
ing the SEZ to the domestic economy.
SEZ Inception: Infrastructure Development

and the Business Environment
The development of a world-class infrastructure and business environ-
ment is the first step in the design of an SEZ. This step is all the more
important given the fierce international competition to attract manufac-
turing investment in SEZs. As an example, more than two-thirds of the

FDI received by the Shenzhen SEZs went into tourism and real estate
development in 1981, and only 16.3 percent went to manufacturing
activity. Although industrial growth was the goal of the SEZ, pragmatism
prevailed among investors confronted with the poor quality of infra-
structure (unreliable water and electricity, lack of housing and commu-
nication links), and real estate development also had a shorter return
period and smaller profit margins. Lack of efficient legal and financial
systems deterred many potential investors from undertaking large-scale
manufacturing investments. The government responded to such undesir-
able outcomes by making massive investments in infrastructure and
improvements in the business environment, hence reversing the course
of events.
Labor-Intensive Manufacturing
Developing labor-intensive manufacturing activities linked to domestic
production capabilities is typically the second step in the development of
an SEZ. This step can be one of intense learning and can increase basic
technological capabilities, provided that the proper channeling of capital
inflows and appropriate regulatory guidance is given.
In 1982, in Shenzhen, the SEZ authorities issued strong guidelines
to foreign investors on which sectors FDI should focus. Interestingly,
Shenzhen initially aimed to attract high-technology firms, but prag-
matically dropped the term “high-technology” for “some technology” in
its requirements for manufacturing FDI, which was in greater accord
with the absorptive capacity of the area. Small manufacturing (mainly
processing and assembly) enterprises in mature industries were set up,
based on differential wage costs. Cheap labor combined with guaran-
teed production capability involved only minor technological adapta-
tion capability. “Exports” of these manufactured products started to be
allowed on a restricted basis to the domestic market. Here, the needed
technological capability was in adapting the manufactured products to
the domestic market: changing the product to suit domestic market
conditions and demands, adapting the product or process to take into
account special features of local material supply, and adapting prod-
ucts to local conditions (climate, temperature, etc.). Seventy percent of
the enterprises in the SEZ were upgraded technologically over a
10-year period (Liu 2002). If the appropriate linkages are not made
and technological capabilities are not built up, SEZs may give lacklus-
ter results (see box 8.5).
Box 8.5
SEZs in Cambodia
FDI has grown at a high rate over the past decade, with $10.9 billion coming into
Cambodia in 2008, playing a key role in employment. The initiatives taken to
maximize linkages to the MNCs and foreign-invested enterprises to upgrade the
domestic technology and knowledge base have remained scarce. Importantly,
the impact of the significant FDI Cambodia receives on technology transfer and
spillover appears to be negligible. SEZs are an important part of the country’s
economic development because they bring infrastructure, jobs, skills, and
enhanced productivity. Since 2005, the Royal Government of Cambodia has
approved a total of 21 SEZs. Of the 21, only 6 have commenced operations as of
early 2010. Virtually no policies, mechanisms, or incentives are in place to encour-
age foreign firms to engage in technology or knowledge transfer to local compa-
nies, or to collaborate with local companies. In interviews with the SEZs in Phnom
Penh, it appeared that little interaction existed between firms in the SEZs and
local universities or technical institutes; firms occasionally train their low-skilled
workers in-house. Highly skilled workers and managers usually are brought in
from the respective country of origin. Inputs and technology also are imported.
Source: Author, based on Zeng and White (2010).
Figure 8.2 is a schematic of the transition between an island SEZ,

typically one exemplified by many SEZs, in which linkages to the domes-
tic economy are severely limited or inexistent, and a catalyst SEZ, in
which technological capabilities are being upgraded and domestic link-
ages are created.
Technology-Intensive Manufacturing
The third step—transitioning to high(er) technology manufacturing—
was gradual in all East Asian SEZs, particularly in view of the fact that
technological capabilities take quite some time to build up. In the case of
Shenzhen, the transition to technology-intensive manufacturing was
brought on naturally by two factors: the cost of land, making it no longer
a place for labor-intensive manufacturing industries; and increasing com-
petition from mainland China and other SEZs, including firms set up
outside the SEZs by former employees. Through a number of deliberate
government policy reorientations, FDI for high-technology firms was
Figure 8.2 Island to Catalyst SEZs
FDI X FDI X
labo
r
SEZ skills
Domestic firms SEZ
technology
national or “host” economy
reforming national or “host” economy
Source: Author.
encouraged by (1) incentives, such as tax holiday extensions, priorities for

public utilities, and opening of domestic market; (2) infrastructure sup-
port and technology support services, including quality support services
through the Shenzhen Quality Assurance Centre and funded by
Shenzhen Technology Monitoring Bureau to help manufacturers build
quality into their design, management, and production systems; (3) pro-
ductivity enhancement services (lab facilities, specialized training, con-
sultancies); (4) information services, most notably, the Technology
Market Center in 1993, and information on new technology for indus-
trial firms; and (5) strong laws and regulations protecting intellectual
property rights (IPR).
In the case of Taiwan, China, the transition to technology-intensive
manufacturing was done in part through regulation: New garment indus-
tries were not allowed in Taiwan, China’s EPZ as of 1974, for example
(see table 8.3). Figure 8.3 illustrates the transition between the second
and third steps in the development of an SEZ. The figure shows the grow-
ing linkages with domestic firms leading to greater competitive pressure
from them in the technology-intensive stage.
Conclusion
This chapter has attempted to clarify how SEZs can stimulate innovation
and advocate proactive and sequential policies to facilitate domestic
absorption of foreign technological know-how.
Developing an SEZ that boosts technological change and innovation
can be rewarding for developing-country governments. However, devel-
oping an SEZ that drives innovation potentially involves a relatively
coordinated set of medium-term policies, many of which attempt to
Table 8.3 Staged Approach to the Development of an SEZ: The Shenzhen Case
Stage Inception Labor-intensive Technology-intensive
Comparative Incentive package Low-cost labor surplus; Low-cost highly edu-
advantage for FDI; location location-specific cated labor; accumu-
specific advantage; huge lated skills and capital;
advantage domestic market; huge domestic
incentive package market; FDI with ad-
for FDI vanced technologies
Main prod- Tourism and real Toys, clothes, and Computers, switches,
ucts and estate develop- bicycles integrated circuits
sectors ment
Source of None Hong Kong, China Industrial countries
technology
Role of Infrastructure Help firms find employ- Technology infrastruc-
government building; Institu- ees nationwide to keep ture building; protec-
tional reforms the competitive position of intellectual
tion; faced with other property rights
low-cost competitors
Source: Wei (2000).
Note: FDI = foreign direct investment.
Figure 8.3 SEZs from Linkages and Technological Capabilities to Upgrading
FDI X FDI X
labo
labo r
r skills
skills
SEZ technology
Domestic firms
technology ion
competitive competit ade
tech upgr
domestic firms stimulates
reforming national or “host” economy:
-upgarding local skills/firms
-reforming business environment national or “host” economy
Source: Author.
upgrade domestic conditions (see table 8.4). These policies may include
fostering linkages and spillovers between firms in the SEZs and firms
outside, in particular, by building domestic capabilities in local firms and
training a domestic labor force to take advantage of spillovers. Fostering
labor circulation from the SEZs to the domestic economy can generate
positive spillover effects. Experience suggests that reforms of the domes-
tic investment climate, to emulate to some extent that of the SEZs, can
help domestic firms develop. Finally, it is important to choose the location
of the SEZs carefully.
Table 8.4 Some Policies Aimed at Stimulating Innovation Through SEZs

Policies Examples
Fostering Attractive conditions and The Republic of Korea; Taiwan,
linkages incentives that make it cost- China
effective to use local-content
Increasing Investment in training, technology Skills Development Fund
domestic upgrading of domestic workforce (Singapore); Penang Skills
capabilities to match; allow and encourage Development Center
domestic firms to have same (Malaysia); Satellite Relations
access to hardware (machines) Program (Taiwan, China); Intel
to upgrade production (Republic Corporation (Costa Rica)
of Korea)
Labor Encouraging placements in local Shenzhen, China; Taiwan, China
circulation firms by managers inside SEZs,
lifting restrictions on labor
circulation
Accompanying Upgrading the overall national All successful dynamic SEZs
investment investment climate outside the
climate reforms SEZs so domestic firms can
flourish
Location Physical location (proximity to All successful dynamic SEZs
economic hub) and infrastructure
linkages are important
Source: Author.
Note: SEZ = special economic zone.
Notes
1. Notably, because firms that export typically make deliberate decisions before
exporting in terms of investment training and technology, the before and after
effects are likely to be smaller.
2. Some data from Taiwan, China, are interesting in this respect.
3. The World Bank’s regular Investment Climate Assessment and Doing Business
reports can provide useful guidance to necessary national reforms.
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CHAPTER 9
Early Reform Zones: Catalysts

for Dynamic Market Economies
in Africa
Richard Auty
Context
This chapter proposes the concept of an Early Reform Zone (ERZ) as a
policy tool for restructuring rent-distorted economies in Sub-Saharan
Africa. The ERZ is a second-generation SEZ that immediately provides
three critical postreform conditions—world-class infrastructure, business-
friendly services, and property rights and the rule of law—within dis-
torted economies to rapidly expand a dynamic market economy. Most
economies in Sub-Saharan Africa were badly distorted by decades of
patronage-driven rent cycling (Ndulu et al. 2008), whether the rent ema-
nated from natural resources, foreign aid (a geopolitical form of rent), or
manipulation by governments of relative prices (regulatory rent). The
emerging theory of rent cycling demonstrates that patronage-driven rent
deployment not only distorts the economy but also entrenches powerful
rent-seeking groups that oppose reform and trigger growth collapses
(Auty 2010).
207
The political legacy of rent cycling explains why recovery from the
growth collapses of the 1970s and 1980s has been protracted for many
Sub-Saharan African economies: rent recipients oppose economic restruc-
turing because it shrinks their scope for rent extraction. The opposition
of rent recipients therefore requires that economic reform be expressly
complemented by a political strategy to manage the opposition. In con-
trast to the first-generation EPZs, the ERZ eschews subsidies and is not
time constrained. This approach is taken to discourage rent-seeking activ-
ity. Moreover, the ERZ also forms part of a specific development strategy
to steadily extend reform throughout the economy and simultaneously
build a proreform political coalition that, as the relative size of ERZ activ-
ity expands, becomes politically strong enough to neutralize the distorted
rent-seeking economy.
This chapter argues that the required political dimension can be most
effectively provided by the ERZ playing a critical role within a dual-track
reform strategy (Lau, Qian, and Roland 2000). In fact, key elements of
ERZs can be identified in some first-generation SEZs that were deployed
successfully as part of dual-track reform strategies in China, Malaysia, and
Mauritius to simultaneously restructure distorted economies and shrink
rent-seeking activity through the medium and long term. Most African
efforts to deploy SEZs occurred later, but rather than benefiting from the
experience of others, they frequently have disappointed because they
failed to provide the basic needs of a dynamic competitive economy.
Even when fiscal stabilization and trade opening were finally secured in
most Sub-Saharan African economies from the late 1990s, the results still
were disappointing because reformers neglected to establish a business-
friendly environment along with a proreform political coalition.
Deficiencies have included unreliable electricity and water services,
excess regulation, rent-seeking customs agencies, unsuitable locations,
and high-cost, low-productivity labor supplies (Farole 2010). The ERZ
expressly seeks to overcome such coordination failure by concentrating
activity within geographic zones in which services are provided by a
reputable commercially oriented management company that promotes
rapid expansion of both the firms and their interests. For those Sub-
Saharan African economies that have progressed further with economic
reform, ERZs can attract FDI and incubate dynamic internationally
competitive firms that eventually will challenge established monopolies
in the unreformed sector, forcing them to compete or shut down. The
ERZ therefore becomes a catalyst for reform of the initially much larger
rent-distorted economy not only through its internal expansion and
Early Reform Zones: Catalysts for Dynamic Market Economies in Africa 209
demonstration effect on adjacent firms in the distorted economy, but also

through the establishment of additional ERZs.
The dual-track strategy recently acquired greater interest for African
economies because China is contributing to seven economic zones in the
continent, partly to encourage the globalization of Chinese firms, and it
may extend the total number (Brautigam and Tang 2010). The Chinese
experiment is partly a response to the disappointing track record of most,
but not all, previous SEZs in Sub-Saharan Africa. Watson (2001) attri-
butes the failure of the continent’s EPZs other than Madagascar (and
Mauritius) to implementation failures rooted in deficient infrastructure,
unstable incentives, and inadequate government services (including
export zone management). He might have added macroeconomic instabil-
ity as a fourth cause of failure because macroeconomic conditions dete-
riorated in many Sub-Saharan African economies through the 1970s, and
improvements in most economies were delayed (by entrenched rent-
seeking interests) into the late-1990s.
Cling, Razafindrakoto, and Roubaud (2005) contrast the robust suc-
cess of EPZs in Madagascar (until recently) with failures elsewhere in the
continent, such as Senegal, Cameroon, Kenya, and Zimbabwe. Glick and
Roubaud (2006) demonstrate the beneficial employment outcomes of
the Madagascar EPZs, which predominantly employ young, semiskilled
female workers. The workers earn significantly more than their counter-
parts in the informal sector and are remunerated at a similar rate to men,
improving gender wage equity. Glick and Roubaud also report that EPZ
jobs are comparable to (and some superior to) jobs elsewhere in the for-
mal sector, although long hours and high worker turnover restrict the
EPZ as a source of long-term employment. However, Cling, Razafindrakoto,
and Roubaud (2005) also confirm the importance to successful zones of
stability, including a sound macroeconomic environment, which few gov-
ernments in Sub-Saharan Africa could sustain through the 1970s and
1980s, but more have managed since. Provided that macrostability is
achieved, not least in regard to the real exchange rate, ERZs are designed
to address the criticisms of first-generation SEZs.
This chapter is presented in four sections. The next defines the ERZ in
the context of related spatial policy tools for economic restructuring and
identifies, and corrects, a basic confusion in both the terminology of zones
and zone objectives. The following section analyzes the successful experi-
ences with first-generation SEZs in China, Malaysia, and Mauritius, not-
ing how their SEZs functioned as catalysts for economywide economic
reform. The next section explains how ERZs can avoid the generally
disappointing outcomes of first-generation SEZs in Africa. The final sec-

tion summarizes the policy implications for economic reform in Sub-
Saharan Africa.
The Confused Definitions and Aims of Special Economic Zones

The term SEZ embraces a wide range of spatial policy tools that often
are defined inadequately so that they elicit much confusion and inaccu-
rate stereotyping. Although ERZs share some characteristics with growth
poles and EPZs, which are the two the most common variants of SEZs,
they differ from them both in significant ways. Basically, ERZs are geo-
graphic areas located within distorted economies, which have yet to
establish effective competitive markets. Within the ERZs, postreform
conditions (world-class infrastructure, business-friendly services, and
property rights and the rule of law) immediately apply. The fundamental
objective of ERZs is to quickly establish the conditions of a fully
reformed competitive market economy for investors within specific geo-
graphic zones inside an otherwise-distorted economy. In contrast to
EPZs, which characterized the first-generation SEZs (first appearing in
the 1960s), ERZs eschew subsidies because the success of many devel-
oping-country SEZs has reduced the risk for second-generation entrants.
Experience elsewhere (some of which is elaborated below) shows that if
coordination failures are overcome and world-class infrastructure is con-
centrated in professionally managed ERZs, then new entrants do not
require subsidization. The basic point of the ERZ is to establish com-
petitive world-class firms immediately rather than to nurture them from
infant status.
In addition, the ERZ is executed as part of an economy-wide dual-
track strategy, which adds the essential political component that the
reform of distorted economies requires to be effective. The strategy rec-
ognizes that the top-down economic reform of such economies is likely
to be undermined by the beneficiaries of rent-seeking, because reform
extends competitive markets, which reduce their scope for rent-seeking
activity. The dual-track reform strategy manages this risk to incumbent
governments by using ERZs to kick-start a dynamic market economy,
which forms Track 1 and rapidly expands employment, skills, taxes, and
exports. Track 1 initially is modest in size, but it builds a proreform
political coalition that can eventually take on opponents of reform
and neutralize or co-opt them. Meanwhile, reform proceeds slowly in
the rent-distorted sector (Track 2) to avoid early confrontation with
rent-seekers, which a reforming government is likely to lose. Successful

dual-track economic reform in economies as diverse as China, Malaysia,
and Mauritius shows that SEZs can grow a dynamic market economy
within 15 years to a scale that dominates the total economy, while also
nurturing a proreform political coalition capable of managing rent-seek-
ing interests in Track 2.
Compared with alternative spatial policy options, ERZs avoid the
problems of overambitious scale that plagued most first-generation
growth poles (Parr 1999). The initial wave of growth poles was discred-
ited. Like ERZs, they sought to overcome coordination problems, but
they went further by attempting to capture agglomeration economies
by concentrating activity geographically. In practice, the optimum scale
of growth poles proved so large that it outstripped domestic imple-
mentation capacity, squandering the potential economic benefits, as
most arrestingly in the case of Republica Bolivariana de Venezuela’s
Ciudad Guayana (Auty 1990, 227–48). Meanwhile, in the theoretical
literature, Murphy, Shliefer, and Vishny (1989) clearly do not appreci-
ate the real-world impracticality of the successful coordination of the
massive investment required by an industrial push (Auty 1994) that is
beloved by balanced-growth enthusiasts. The heyday of first-generation
growth poles was in the 1970s when they were extensively, and invari-
ably unsuccessfully, used to revive economic activity in lagging regions
(Parr 1999).
The EPZ has proved more resilient than growth poles, but it has had
geographically mixed outcomes, with better results in Asia and Central
America than in Sub-Saharan Africa and South America (Watson 2001;
Jayanthakumaran 2003). For example, cost-benefit analysis undertaken for
EPZs in six Asian countries in the 1990s identified positive rates in all of
them except for the Philippines, where the Marcos government mistakenly
conferred overgenerous subsidies at the outset (table 9.1). But although
most first-generation EPZs failed in Sub-Saharan Africa, not all did so.
Five systemic criticisms of EPZs can be easily explained and dis-
missed because EPZs evolve and mature, which greatly strengthens
their economic benefits. The criticisms therefore apply mainly to the
many zones in Sub-Saharan Africa that failed to move beyond the early
stages. Effectively implemented EPZs that manage to mature neutralize
the standard criticisms, namely, that wages are low, skill transfer is neg-
ligible, net export earnings are significantly less than gross export earn-
ings, foreign firms squeeze rent from incentives and relocate when the
incentives expire, and tax incentives cut government revenue. Because
Table 9.1 Export Processing Zone Performance, Six Asian Economies

(percent)
Korea,
Rep. of Malaysia Sri Lanka Philippines Indonesia China
EPZ jobs/total jobs, 1995 n.a. 2.1 4.4 0.3 n.a. 12.0
EPZ foreign profit/ total
profit, 1995 n.a. 100.0 60.0 70.0 n.a. 30.0
EPZ exports/total manu-
factured exports, 1980s 1.0 49.0 44.0 16.0 n.a. 12.0
EPZ net export/total
exports, 1980s 53.2 33.0 27.9 26.2 62.4 16.4
EPZ FDI/total FDI, 1980s 4.0 13.4 73.8 22.6 5.5 11.6
Domestic raw material/
total EPZ raw material 34.0 4.0 5.3 6.0 41.0 n.a.
Economic internal rate
of return 15.0 28.0 23.0 –3.0 26.0 10.7
Source: Jayanthakumaran (2003), 59 and 61.
Note: EPZ = export-processing zone; FDI = foreign direct investment; n.a. = not applicable.
SEZs absorb unemployed labor and that is a useful net gain in itself,
this feature undercuts the first criticism. The second criticism is inac-
curate for EPZs that mature: there is incontrovertible evidence from
China, Malaysia, and Mauritius that over the long term, successful
EPZs raise skills and productivity, whereas rent-distorted economies
struggle. Finally, the ERZ is expressly designed to avoid the three
remaining criticisms of EPZs. First, ERZs expand rapidly so that even if
value added is a modest share of enterprise revenue, the aggregate
value added quickly becomes substantial and linkages proliferate with
adjacent Track 2 activity. Second, the ERZ offers a competitive incen-
tive regime rather than subsidies, which may have been necessary for
the first-generation SEZs in developing countries but no longer are
needed. Consequently, the risk of nurturing rent-seeking is diminished.
Third, ERZs generate taxes from the outset in addition to foreign
exchange from exports, technology transfer, and skills. In fact, because
the five criticisms apply to failed EPZs, in that specific context, they
may be correct.
Perhaps most important, ERZs aim not only to create employment,
exports, and taxes, but also to incubate dynamic competitive firms capa-
ble of rapidly developing and harnessing new ideas to drive welfare
improvements, an achievement central to sustaining gains in African wel-
fare. The new competitive enterprises in the Track 1 ERZs generate posi-
tive spillovers for adjacent Track 2 activity within the distorted economy.
The central goal of the ERZ is the proliferation of internationally com-

petitive firms throughout the economy. This enables the distorted econ-
omy in Track 2 to experience relative decline, and its capital and labor can
be absorbed progressively into a modern market economy that expands
from Track 1. In contrast to most first-generation SEZs, including growth
poles and EPZs, ERZs are not specifically targeted at attracting high-tech
activity or at reviving depressed regions but rather at attracting invest-
ment by dynamic companies. The ERZ makes no attempt to pick winners
in terms of product, source of investment, or intended geographic
market.
In the context of Sub-Saharan Africa, the ERZ simply aims to encour-
age a rapidly expanding number of firms to efficiently employ African
land, labor, skills, and capital. To date, companies have been deterred by
the absence of the basic conditions required to establish and sustain effi-
cient production in Africa, not least business-friendly regulation and
institutions. The ERZ seeks to rectify these shortcomings by establishing
such conditions immediately, thereby creating a catalyst for the rapid dif-
fusion of a dynamic market economy capable of sustaining economic
growth by raising productivity, an outcome most but not all distorted
economies have found elusive (World Bank 2009).
Until the proreform political coalition has grown strong enough to
see off opponents of reform, the ERZ is vulnerable to the policy capture
that would turn it into just another agency to facilitate rent-seeking
activity, as occurred with the Russian SEZs (Tuominen and Lamminen
2009). Most firms within the first-generation Russian SEZs located to
escape taxation and showed little interest in being internationally com-
petitive. They did not sustain their activity when the time-constrained
subsidies expired. In short, most Russian ERZs simply generated rents
for less than dynamic companies. The defense against policy capture is
the formation at the outset of a prozone political coalition, which has a
vested interest in the success of the zone. The coalition includes not only
local workers and local government leaders that stand to gain directly
from the ERZ’s success, but also investors in the ERZ infrastructure,
which for Sub-Saharan Africa include international financial institutions
(IFIs) like the Asian Development Bank and World Bank. The participa-
tion of the IFIs creates a real risk of painful reprisal should a government
fail to ensure that legal contracts are upheld. In addition, recent evidence
from Russia with regard to Rosneft’s acquisition of some of the Yukos
hydrocarbon company’s assets indicates that extranational courts can
penalize asset confiscation (Economist 2010). Finally, WTO membership
provides a further means of increasing the risk of painful retaliation

for failure to uphold contracts. In the last resort, however, investment
risk cannot be entirely eliminated, only minimized and perhaps insured
against.
Examples of Successful SEZs

Three cases of successful deployment of SEZs are examined in this
section. Mauritius is analyzed as an early pioneer of the dual-track SEZ
strategy, demonstrating clearly how SEZs can (1) adjust to changing
competitive advantage by improving workforce skills; (2) drive econo-
mywide structural change; and (3) strengthen a progrowth political
coalition until it outweighs the rival interests that benefit from rent
distortion. Malaysia confirms the capacity of economic zones to pro-
mote a dynamic market economy and also shows that textile manufac-
ture is not the sole route by which this is achieved. Moreover, Malaysia
demonstrates how SEZs can diversify an initially resource-rich econ-
omy into a manufacturing-driven economy. Mauritius and China have
resource-poor economies, which rent-cycling theory shows act to
strengthen elite incentives to promote sustained economic growth. The
case of China most dramatically reveals the strength of the spillover
effects from SEZs.
Mauritius: How the Zone’s Comparative Advantage Evolved

Mauritius illustrates how an economic zone functioning within a dual-
track strategy can dramatically change the fortunes of a small remote
economy. As a sugar mono-crop island economy, Mauritius faced a
Malthusian situation in the 1960s in the face of rapid population growth
and emerging land scarcity. Quickly appreciating the limits of industri-
alization by import substitution, the government established an SEZ in
1971 primarily to absorb surplus labor. It initially attracted capital from
Hong Kong, China, where investors sought to surmount EU and U.S.
quotas and tariffs on textile exports by supplying these two major mar-
kets from Mauritius. In addition, local sugar planters invested part of a
sugar price windfall in 1972–1975 in the SEZ to diversify their options
(Findlay and Wellisz 1993). Finally, as part of its Track 2 strategy, the
government of Mauritius used some of the extra tax revenue from the
sugar boom to undercut radical opposition to market-driven growth by
increasing social spending from 6 percent of GDP to 10 percent of GDP
through the 1970s. The dual-track policy drove per capita GDP at
6 percent annually through the 1970s and eased the simmering social
tension of the 1960s.
Mauritius’ SEZ joint ventures of the 1970s gave way in the 1980s to
mainly domestic investment, specializing in textiles. Once surplus labor
was absorbed and real wages began rising, however, low-value textile
items were relocated offshore to Madagascar, allowing Mauritius to focus
on higher value products such as textile design, spinning, weaving, and
knitting. This outcome flatly contradicts the criticism that SEZs merely
employ low-wage labor. At its peak, the Mauritius textile industry was the
second-largest world producer of knitted textiles; the third-largest
exporter of pure wool tissues, and the fourth-largest exporter of T-shirts
to Europe. The zone employed 60,000 workers in 500 firms generating
$1.2 billion in exports. A state enterprise serviced the SEZs and included
among its functions the provision of such externalities as training, invest-
ment credits, and negotiation of trade agreements. In 1985, 14 years after
the start-up, the government replaced the SEZ tax holiday with a 15
percent profit tax along with incentives to export for import substitution
firms within Track 2. By then, the two tracks had all but merged.
SEZ expansion drove Mauritius per capita GDP at 5.7 percent annu-
ally through the 1980s as rapid passage through the demographic transi-
tion cut population growth to 1 percent. Manufactured exports rose from
one-quarter of the total in 1980 to two-thirds in 1990, ending sugar’s
dominance. SEZ employment tripled and, by 1990, national unemploy-
ment fell to 4 percent from 21 percent, creating labor shortages that
strengthened pressure on firms to diversify into more productive activity.
By the mid-1990s, Mauritian textile wages were four times those of
China and Vietnam and prompted diversification into information tech-
nology within the evolving SEZ (Chernoff and Warner 2002). Services
increasingly drove the economy: tourist arrivals quintupled to 700,000 in
2003, and financial services rapidly expanded. Moreover, the government
used the sustained economic buoyancy to restructure the once-dominant
sugar industry as WTO rules phased out sugar’s geopolitical rent over
2001–2009.1
From 1971 onward, Mauritius’ SEZ attracted competitive manufac-
turing as part of a dual-track economic reform that postponed confronta-
tion with pro-redistribution political forces, including the powerful
unions in the initially dominant sugar industry until the dynamic sector
was sufficiently strong, both economically and politically, to absorb sur-
plus labor from the lagging sector and also to reform it. Interestingly,
Mauritius’ experience paralleled that of Malaysia after the Malaysian
government established free trade zones in 1971, but electronics were

initially the key export product there, rather than textiles.
Malaysia: Zones Facilitate the Shift from Resource-Driven to

Skill-Driven Development
Like Mauritius, Malaysia realized the limits of import substitution indus-
trialization well before most other developing economies, and its govern-
ment embraced export industry, despite the country’s richly diversified
natural resource endowment. The motivation for change was the inability
of infant industry, which proved to be capital intensive, to contribute
significantly to unemployment alleviation, which was critical for improv-
ing the lagging welfare of the majority native Malay population. From
1968 onward, the government began encouraging export manufacturing
because it was more labor intensive. It offered export manufacturers
reduced taxation linked to export performance and domestic content; tax
deductions on export promotion expenses; accelerated depreciation
when more than 20 percent of production was exported; and preferential
rates on government export financing and insurance (Salleh and
Meyanathan 1993, 9). In 1971, free trade zones were established, which
were deemed outside Malaysian territory for the purpose of customs and
excise duties. They conferred duty-free imports of capital and inputs for
goods that were processed for export. Land within the zones was leased
to firms at below-market rates, but firms normally built their own facto-
ries rather than leasing them. In addition, company tax relief was pro-
vided for specified periods.
Foreign investors in Malaysia through the 1970s were mainly from
the United States and Japan, but in the 1980s Taiwan, China, rose to
prominence and contributed more than one-third of Malaysia’s FDI.
Electronics exports were initially a key component in Malaysia’s rapid
manufacturing expansion. Like Mauritius’ textiles, Malaysian electronics
initially absorbed cheap labor but subsequently became technologically
more sophisticated and, by the late 1980s, they generated one-fifth of all
manufacturing employment and half of industrial exports. During
1982–93, the share of manufacturing in Malaysian exports jumped from
22 percent to a dominant 74 percent, and the composition of manufac-
tured exports switched toward telecommunications (Islam and
Chowdhury 1997, 228). The resulting growth in the contribution of
exports to industrial output steadily reduced the economywide average
effective rate of protection from 45 percent in 1969 (itself modest by
developing-country standards at the time) to 31 percent in 1979 and
17 percent in 1987 (Edwards 1990), just 16 years after the SEZs were
established. The Mahathir government rashly launched a heavy industry
drive in the early 1980s, just as the Republic of Korea was reacting
strongly against that policy and the social and economic costs it had
imposed on the majority of the population. Much Malaysian heavy
industry was prone to rent-seeking and required prolonged adjustments
to mitigate the worst consequences. Fortunately, the export manufactur-
ing sector proved sufficiently resilient to absorb the costs of Malaysia’s
ill-judged heavy industry drive. Malaysia not only confirms the viability
of the dual-track strategy and the speed with which economywide
reform can be achieved but also demonstrates that the strategy can work
in a natural resource–abundant economy as well as in resource-poor
economies like Mauritius and China.
China: The Mechanism of the SEZ Spillover to

the Rent-Distorted Sector
China provides a sterner test of the viability of the dual-track strategy in
a strongly distorted economy within which central planning had repressed
markets for three decades. Although the Chinese economy was less dis-
torted than that of the USSR when their respective governments com-
menced reforms (de Melo, Denzier, Gelb, and Tenev 2001), the process
of economic reform still encountered strong vested interests within the
dominant state-owned industrial sector. This opposition prompted the
Chinese reformers to eschew top-down big-bang reform for gradual
reform that first reformed agriculture and then, using SEZs in the south-
eastern coastal region, reformed industry to create employment and
attract foreign investment, notably from the adjacent economic agglom-
erations Hong Kong SAR, China, and Taiwan, China. China also clearly
illustrates the demonstration effect of the SEZs on firms in the adjacent
rent-distorted economy.
The Chinese SEZs were formally established in 1980 to restructure
the economy by tapping into foreign investment and expertise. The gov-
ernment aimed to test a controlled economic liberalization after three
decades of central planning and economic autarky. China initially estab-
lished four zones on the coast: three in Guangdong province close to
Hong Kong SAR, China, at Shenzhen, Zhuhai, and Shantou; and one at
Xiamen in Fujian, close to Taiwan, China. The number of zones increased
through the 1980s and 1990s to 200 with varying structures, ranging
from free commercial zones to free industrial zones and technology parks.
Of all China’s principal regions, the neglected southern coastal region
initially was well placed to sustain dual-track reform. The south coast
region had little obsolete industrial capital because of neglect under cen-
tral planning; it was well located to capture spillover effects from the
adjacent dynamic market economies of Hong Kong, China, and Taiwan,
China; and as a resource-poor region, the absence of natural resource
rents incentivized provincial and local governments to promote wealth
creation so they could provide employment and eventually expand the
tax base.
Throughout the 1980s, the SEZs combined lower central taxation
with enhanced infrastructure investment to attract foreign capital invest-
ment first to the original reform zones and then to additional zones
established along the coast (Litwack and Qian 1998). From the early
1990s, the tax benefits were removed from the zones, although invest-
ment in superior infrastructure continued to be concentrated, albeit in a
larger set of zones. From 1994, taxation was equalized across regions, and
government attention shifted from the coast to stimulating the lagging
interior regions. Moreover, government efforts also sharply intensified to
reform the large SOEs (the principal consumers of regulatory rent) in
Track 2 (Farole 2010), which no longer dominated industrial production
but a decade earlier had received a disproportionately high share of capi-
tal investment and had been sufficiently powerful politically to discour-
age top-down economic reform.
The SEZ strategy contributed strongly to China’s rise to become a
leading world exporter of manufactured goods and the principal recipient
of FDI among the developing economies. During 1979–95, the SEZs
helped China attract 40 percent of all FDI to developing countries, of
which the coastal areas received 90 percent. Guangzhou alone drew
40 percent of Chinese FDI, which with the two other local SEZs, lifted
the local share of FDI to 50 percent. Importantly, the gains were made
rapidly: whereas the south coast region occupies 5 percent of China’s
land area and held 19 percent of the population, by the mid-1990s, it
generated 32.7 percent of national GDP, which represented a gain in
share of 8.5 percent of national GDP during 1980–1995 (Golley 1999).
China experimented not only with economic incentives but also with
different forms of enterprise. The rise of new more flexible enterprises
resulted by the mid-1990s in the expansion of township and village
enterprises (TVEs), which were basically local devices to absorb surplus
rural labor in self-supporting employment. TVEs accounted for two-fifths
of China’s manufactured output, mostly for the domestic market. In
addition, however, joint ventures grew to 15 percent of manufactured
output, but they generated half of all China’s consumer goods and two-
fifths of its exports; MNCs produced half of all exports, worth 9 percent
of GDP (Gang 2001).
The SEZ experiment began to transform the Track 2 economy. It
rapidly turned the Zhu Delta around Guangzhou into the second of
three major Chinese agglomerations, with the established zone in the
Chang Delta centered on Shanghai and the third in the Bohai Triangle.
The agglomerations began exerting beneficial spillover effects on local
SOEs. Johnston (1999) shows that provinces hosting one of the three
agglomerations also hosted dynamic competitive manufacturing,
whereas provinces outside the agglomerations did not, including coastal
provinces outside the three agglomerations. Table 9.2 demonstrates
that agglomerations developed shares of non-SOEs and profits in excess
of their share of urban population. Interestingly, however, the profit-
ability of SOEs in the agglomeration provinces was disproportionately
higher than that of SOEs elsewhere. The higher ratio of viable SOEs in
the agglomerations confirms positive spillover effects from adjacent
market enterprises. The ratio of the share of SOE profits to the share
of SOEs in the interior regions remote from the three agglomerations
is significantly lower (see table 9.2), with the exception of three
resource-based activities (Henan oil and coal, Heilongjiang oil, and
Yunnun tobacco).
Aslund (1999) argues that such rapid extension of local competition
as occurred in China reduces scope for rent-seeking by government offi-
cials. Because growing competition between firms in adjacent authorities
shrinks the regulatory (government-created) rents, local officials thereby
acquire an incentive to pass residual claims, for example, from underem-
ployed workers, on to enterprise managers to avoid incurring onerous
social support charges (Li, Li, and Zhang 2000). Officials need to improve
efficiency incentives for local enterprises so that they can bear the extra
Table 9.2 Ratio of Firms, Workers and Profits to Urban Population Share,
Chinese Regions, 1996
Urban Non-state enterprise ratios State enterprise ratios

population (%) Firms Workers Profits Firms Workers Profits
Coast south 27.25 1.15 1.20 1.88 0.78 0.60 0.97
Coast north 23.35 0.82 1.00 0.99 0.83 0.98 1.35
Center 43.45 1.01 0.90 0.54 1.19 1.21 1.33
West 4.95 0.91 0.80 0.18 1.59 1.47 0.20
Source: Johnston (1999), 13.
social responsibilities, which can be achieved by replacing SOEs with

more efficient private firms (including MNCs) or initially at least with
profit-sensitive cooperatives like the TVEs. The pressure for proefficiency
change is sensitive to the tax rate, however, which exerts an inverse-U
effect, because high taxes repress the incentives of management to be
efficient, whereas low taxes diminish government interest in boosting
enterprise efficiency (the fruits of which yield taxes).
The final part of the competitive spatial dynamic triggered by SEZs
worked by encouraging the non-SOE managers to demand both legisla-
tion to fully safeguard private property rights and independent courts to
enforce contracts that are free of government manipulation (Li, Li, and
Zhang 2000). Consistent with this thesis, Li, Li, and Zhang (2000) show
that privatization spreads faster in cases in which competition is most
intense, that is, in simple undifferentiated products and in the presence of
sharply falling transport costs, which characterized the south coast region
in the 1980s and 1990s. Li, Li, and Zhang (2000) also find that privatiza-
tion occurs faster among lower tiers of government. In the absence of
scale economies in local enterprises, local TVEs face intensifying competi-
tion sooner than large national SOE monopolies, thereby facilitating
entry by new small firms. Additionally, local officials have less administra-
tive and legal leverage with which to protect firms than higher tiers of
government. However, the relevance of this particular facet of Chinese
reform for natural resource-rich African economies (which most are) is
potentially undercut by the fact that, as a resource-poor economy, the
Chinese elite had a strong incentive to grow the economy by efficient use
of capital and labor, rather than by relying on politically driven (and per-
sonally enriching) rent cycling (Auty 2010). This is why the case of
resource-rich Malaysia is particularly instructive for African economies.
Most critically, in all three successful country cases, the first-generation
SEZs proved effective catalysts for establishing or sustaining dynamic mar-
ket economies (Track 1) that acquired the capacity to transform lagging
sectors within the initially dominant rent-distorted economy (Track 2), an
outcome that all three countries achieved within the space of just 15 to
20 years.
The Potential Role of ERZs in Sub-Saharan Africa

ERZs set the bar higher for potential investing companies than the first-
generation SEZs by eschewing subsidies and encouraging efficient and
competitive enterprises from the outset. Rather than subsidizing firms

through an “infant” start-up phase, Fafchamps, El Hamine, and Zeufack
(2008) find from research in Morocco that firms thrive by learning from
meeting foreign demand, which is discerning, rather than by “production
learning” as a consequence of first reducing costs in the domestic market.
This approach in turn results in export firms commencing overseas sales
shortly after their start-up. These firms also benefit from some degree of
foreign ownership, and most importantly from being productive at the
outset rather than following an infant industry learning curve. A well-
executed ERZ is designed to reduce the risk for second-generation SEZ
firms, although that risk is systematically reduced by the very success of
first-generation SEZs.
Economic geography reinforces the rationale for promoting ERZs
within the economies of Sub-Saharan Africa because ERZs can help them
to tap into spillovers from overseas urban agglomerations that their own
economies will be unable to generate for several decades. Few economies
in Sub-Saharan Africa apart from South Africa and Nigeria are likely to
grow cities of a sufficient size and economic structure to capture the
agglomeration economies. However, the smaller Sub-Saharan African
economies can build links to such agglomerations just as Mauritius did in
the 1970s with Hong Kong, China; and Malaysia did with Japan and the
United States. In contrast, the sheer scale of the Chinese market allowed
that country to quickly promote its own agglomerations, although it did
so by initially tapping into spillovers from Hong Kong, China (Zhu Delta)
and Taiwan, China (Zhang Delta). The smaller African economies can
benefit from agglomeration spillover effects if clusters of same-firm
activities emerge within ERZs that secure localization economies.
Localization economies are more specialized than the agglomeration
economies and enhance the efficiency of firms by achieving the modest
thresholds required to sustain local pools of specialized labor and services,
and specific production inputs, and also by providing high exposure to
innovative ideas. Viewed within this spatial context, the ERZ is an effec-
tive vehicle to nurture the localization economies and confer an advan-
tage over African economies that lack ERZs. Consequently, the spillover
from the agglomerations is not through physical proximity, because such
effects attenuate rapidly, but rather from contact with firms in such
agglomerations as their suppliers, which can create localization econo-
mies through which best business practice and standards diffuse to the
local economy.
In this context, control of operating conditions appears to underlie the

Chinese strategy of systematically expanding SEZs in Africa (World Bank
2010) rather than any conscious intention to establish catalysts of reform
in rent-distorted economies. Brautigam and Tang (2010) identify multi-
ple objectives for the Chinese economic zones, which center on facilitat-
ing export diversification by Chinese companies. The advantages for
China include (1) helping inexperienced small and midsize firms gain
overseas experience; (2) facilitating China’s domestic restructuring by
relocating mature industries offshore; (3) surmounting barriers to
Chinese exports to Europe and North America; (4) tapping into econo-
mies of scale for overseas investment; and (5) creating markets for
Chinese-made machinery. Chinese firms receive incentives that include
grants, long-term loans plus subsidies on loans, and subsidies on up to
one-third of some preparation costs. Host governments are also expected
to extend concessions, such as tax holidays, duty waivers, and relaxed
labor laws, which they have done with different levels of enthusiasm in
different countries. Although the zones are open to domestic and non-
Chinese foreign firms as well as Chinese firms, the latter have tended to
dominate. Most zones remain in an early stage of development and
maturation is projected at a decade. Chinese firms report problems aris-
ing from policy fluctuations, deficient service provision, and inadequate
infrastructure beyond the zones. African agencies express concern over
potential abuses, such as relabeling products made in China for export
and labor exploitation.
A further policy option for those African economies in which mining
is important is to harness the potential to create ERZs presented by major
mining projects operated by international mining companies. International
mines resemble ERZs by functioning as enclaves of efficiency within
underperforming economies. The massive scale of the sunk investment
made in mining renders it imperative for the mining company to negoti-
ate, as a precondition of such investment, conditions of operation that
ensure the efficient application of capital, labor, and technology. Such
mines and oil wells can form the nucleus of ERZs through a modification
of the standard corporate social responsibility policy. Experiments by,
among others, BP in Azerbaijan (Auty 2006) suggest that if international
mining firms reorient their corporate social policies away from filling gaps
in infrastructure that central governments should provide, and instead
substitute the encouragement of new enterprise formation around the
mining area, then the mineral enclave effectively expands into an ERZ.
BP shared infrastructure and gave advice to new entrants, while also
assisting with finance and legal guidance. The mining area nurtures new
economic activity that can continue to operate after mining is exhausted,
helping to sustain the local economy. The proposed shift in corporate
social responsibility policy encourages local entrepreneurs to establish
both mine-related and unrelated businesses. The policy helps to build
local social capital (BP cooperated with the Open Society Foundation to
achieve this in Azerbaijan) within the mining region to strengthen the
lobbying capacity of local governments and businesses for legitimate cen-
tral government assistance.
Conclusions: ERZs and Economic Reform in Sub-Saharan Africa

Effective economic reform of rent-distorted political economies demands
a political component to overcome policy capture by rent recipients. This
chapter argues that African governments can achieve this through a vari-
ant of the dual-track strategy, within which second-generation SEZs,
defined as ERZs, play a critical role. Elements of such a strategy can be
detected in successful reforming economies as diverse as resource-poor
Mauritius and China and resource-abundant Malaysia. The dual-track
strategy postpones confrontation with the rent-seeking opponents of
reform in the rent-distorted economy (Track 2), and it accelerates the
emergence of a dynamic market economy within ERZs, which comprise
Track 1. The Track 1 ERZs immediately provide world-class infrastruc-
ture, effective business-friendly services and incentives, and institutional
safeguards for property rights and the rule of law. The effective coordina-
tion and delivery of this efficient business environment mean that, unlike
the first-generation SEZs, the ERZ firm does not require subsidies. The
successful expansion of dynamic internationally competitive firms in
Track 1 also builds a strong proreform political coalition that can eventu-
ally neutralize rent-seeking elements and confer strong and positive spill-
over effects on economic activity in Track 2.
Mauritius demonstrates the basic dynamic of ERZs, which Malaysia
confirms, and China most clearly shows the beneficial spillover effects of
ERZs on the distorted economy in Track 2. SEZ activity in all three
economies achieved sufficient scale to accomplish radical restructuring
within 15 to 20 years of their launch. Given the many obstacles to busi-
ness formation in Sub-Saharan African economies that are the legacy of
decades of economic distortion, the ERZ seeks to kick-start the emer-
gence of a dynamic market economy. The ERZ geographically concen-
trates the principal components of a business-friendly environment and
leaves the rest of the economy to progress through subsequent spillover

effects.
Most economies in Sub-Saharan Africa are too small to develop cities
large enough to create agglomeration economies. The ERZ can build
localization economies that link to global agglomerations in North
America, Europe, and Asia, and thereby provide access to the stimulus to
raise productivity that such agglomerations generate. In this way, the ERZ
not only facilitates reform but also diffuses productivity-driven growth
throughout the reformed economy. Ironically, the ERZ turns the much-
criticized economic enclave into a virtue by first tapping into the advan-
tages of the enclave to incubate dynamic competitive firms in isolation
from the distorted economy and subsequently allowing the enclave
through its spillover effects to gradually incorporate the rest of the
economy into global best practice.
Note
1. Mauritian sugar production costs under the Commonwealth Sugar Agreement
were 25 percent above world levels and reform aimed to cut them from
US$0.40/kilogram to US$0.26/kilogram by increasing the average factory
size, mechanizing cane production, and releasing marginal land for tourism
and information technology (IMF 2002).
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CHAPTER 10
Planned Obsolescence? Export

Processing Zones and Structural
Reform in Mauritius
Claude Baissac
Introduction
This case study first summarizes the conditions within which the
Mauritius Export Processing Zone (MEPZ) was established and the initial
policy objectives at its root. It then reviews the major national policy
changes that occurred in the early 1980s and how these affected the zone.
Following this review, it provides an overview of the MEPZ’s perfor-
mance since its early days and explores the current challenges being faced
by the program. Finally, it analyzes the relationship between the MEPZ
and broad economic reforms and develops conclusions.
The Policy Environment

Context and Objectives
Following independence in 1968, Mauritius chose a social-democratic
path, with a welfare state providing free universal education and health
care. Economic production, however, remained in the hands of a narrow
elite, highly concentrated in the sugar sector. The MEPZ was created in
227
1971 in the context of an import-substitution development strategy

meant to decrease the economy’s heavy reliance on sugar exports, which
accounted for 75 percent of exports at the time, and the macroeconomic
vulnerabilities this created. Within the broader economic strategy, MEPZ
was very much an ad hoc and secondary instrument focused on absorbing
surplus labor, with unemployment standing at more than 20 percent and
the labor force growing at 3 percent per year. There had been widespread
concerns over the long-term socioeconomic and political viability of the
island, and these concerns fed into policy formulation and political
arrangements.
The exact origin of the MEPZ idea is somewhat disputed. According
to Dommen and Dommen (1999) it originated in a Swiss-Mauritian
entrepreneur, José Poncini, who opened a factory assembling watch jew-
els from imported components using imported machinery in 1965.
Poncini obtained permission from the Mauritian authorities that all
imports would escape duties provided the final product would be
exported. This was the catalyst for the creation of the MEPZ some six
years later. Paturau (1988) argues that the key initiator was Professor Lim
Fat of the University of Mauritius, who proposed the creation of an EPZ
in a lecture after a visit to Taiwan, China, in 1969.
If the role of economic entrepreneurs has been widely acknowledged,
so are those of Prime Minister Seewoosagur Ramgoolam and Foreign
Minister Gaëtan Duval. Duval had been leader of the main opposition
party, the Parti Mauricien Social Democrate (PMSD), and opposed inde-
pendence out of concerns it would jeopardize the position of his con-
stituencies, the French and Creole ethnic minorities. In 1969, the PMSD
joined Ramgoolam’s Mauritian Labor Party to form a coalition govern-
ment, until both parties were defeated by Paul Beranger’s party in 1982,
the Mouvement Militant Mauricien (MMM).1 Although Ramgoolam
advocated import-substitution, Duval, concerned about further economic
marginalization for the Creoles, strongly supported a labor-intensive,
export-oriented approach. This demand contributed to support for the
passing of the Export Processing Zone Act.2 As Roberts (1992, 100)
notes, regardless of its paternity, “Whoever first brought up the idea of an
EPZ for Mauritius, the (Government of Mauritius) is clearly responsible
for the steps that led to its creation.”
Initial investors were primarily Hong Kong, Chinese firms seeking to
bypass European tariffs and quotas by taking advantage of the country’s
preferential access to the European market. European firms soon joined
in, attracted by the country’s bilingual population (French and English).
Planned Obsolescence? Export Processing Zones and Structural Reform in Mauritius 229
From the start, domestic firms invested significantly in the zone, at first
in joint ventures with foreign firms. This investment was allowed by gov-
ernment to limit capital flight. Domestic investment originated from the
sugar rent, which resulted from the European guaranteed prices and a
series of bumper crops. The zone experienced rapid initial growth, with
export growth averaging 9 percent per year between 1972 and 1977. By
1977, the MEPZ employed nearly 20,000 and generated about 50 per-
cent of domestic capital investment.
Economic Crisis and Restructuring

From the mid-1970s, however, government expenditures increased signif-
icantly—by about 18 percent per year—notably, through large-scale
public sector hiring, wage increases, and food subsidies in the context of
serious political instability.3 The currency rose as the country experienced
the effects of Dutch disease, resulting from escalating sugar prices. As
sugar prices declined after 1975 and the international economic situation
combined to hit the economy hard, the government deficit rose rapidly.
Investment dried up, growth collapsed to less than 2 percent in 1979, and
foreign reserves all but disappeared.
In 1978, the government called the IMF for emergency assistance.
A series of bad crops hurt sugar production badly and more emergency
measures were required, including devaluation. In 1981, the World Bank
intervened in a context of continued economic crisis and political insta-
bility. Stabilization and structural adjustment programs targeted the bud-
get deficit and mounting public debt. The productive sector was
liberalized. The economy decisively turned away from import-substitu-
tion to export-led growth by the 1982 socialist government.
With this move, the EPZ became a pillar of the development strategy.
The objective was a diversified economy initially based on three private
sector-led pillars: (1) sugar, (2) the MEPZ, and (3) tourism. This strategy
paid off, and the MEPZ experienced explosive growth from 1983 onward
(see overview of performance section below). In 1985, it overtook sugar
as the primary export earner and employer. Employment in the MEPZ
reached nearly 90,000 in 1989, helping to reduce unemployment to less
than 3 percent from more than 14 percent in 1984. Principal export
markets were France, Germany, Italy, and the United Kingdom. Later,
with the implementation of the African Growth and Opportunity Act,
the U.S. market became an import destination for Mauritian exports.
From the late 1980s onward, the government actively promoted new
sectors while pursuing improved efficiency in existing ones. For instance,
in the sugar industry, it encouraged consolidation, despite the negative

impact on employment. Tourism was significantly expanded, with new
hotels, investment in the flag carrier Air Mauritius, and extensive promo-
tion. The government also pushed for greater productivity in the EPZ.
The launch of the offshore financial sector and the free port in the
early 1990s, and then the Cybercity/ICT initiative in the early 2000s and
the integrated resort scheme in the mid-2000s, represented continuation
in the launch of specialized economic tools capable of ensuring balanced
growth, employment, and sustainability in changing international trade
and investment conditions.
Overview of MEPZ Performance

The government produces regular in-depth data on the economy and the
EPZ. This section highlights the MEPZ’s key performance indicators
since 1973.4
Firms and employment demographics have been closely related over
the life of the zone, with average employment per firm remaining
between 130 and 200, showing a progressive decline over time (see
figure 10.1). The curve shows a number of distinct phases: (1) rapid
Figure 10.1 Employment Data
1,000
800
600
400
200
0
73
76
79
82
85
88
91
94
97
00
03
06
09
19
19
19
19
19
19
19
19
19
20
20
20
20
no. of enterprises as at December

employment as at December, in 100
employment per firm
Source: Government of Mauritius, Mauritius Productivity and Competitiveness Indicators: 1999–2000 (Port Louis,
Mauritius: Central Statistical Office, 2010).
growth until 1976, (2) slow growth between 1976 and 1983, (3) explo-
sive growth between 1983 and 1988, (4) stabilization between 1989 and
1991, (5) decline between 1992 and 1997, (6) recovery in 1998–2002,
and (7) continuous decline since 2003. As at December 2009, employ-
ment was at its lowest level since 1986.
Investment (in 1982 prices, starting in 1979) shows greater variability
within the same general trend (see figure 10.2): (1) decline between 1979
and 1982; (2) explosive growth between 1983 and 1989; (3) decline
between 1990 and 1992; (4) cycles of recoveries and declines between
1993 and 2003; (5) strong recovery between 2004 and 2007, that year
being the highest recorded; and (6) collapse with the global economic
crisis in 2008 and 2009.
Export performance (see figure 10.3) and value added in constant
prices (1982) again has followed a similar general trend.5 Value added
peaked at 3.2 billion rupees in 2001.
Sectoral data are available only since 1992. The most remarkable facts
are (1) the absolute dominance of the apparel sector; (2) its continued
decline in relative and absolute terms in relation to the number of firms,
employment, and exports; and (3) the absence of one or several sectors
compensating for this decline. Indeed the growth of emerging sectors
Figure 10.2 Investment Data
800
700
600
500
400
300
200
100
0
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
investment at 1982 prices, Rs million machinery
Figure 10.3 Exports
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
73
76
79
82
85
88
91
94
97
00
03
06
09
19
19
19
19
19
19
19
19
19
20
20
20
20
exports, f.o.b, Rs million, 1982 prices
such as fish products, and to a lesser extent gems and jewelry, has so
far proven insufficient, notably in terms of export performance and
employment.
Figure 10.4 clearly illustrates the dependency of the MEPZ on the
apparel sector. Not surprisingly, as the Mauritian economy has continued
to diversify over the past decade the MEPZ has declined in relation to the
rest of the economy. Manufacturing as a whole, which is highly concen-
trated in the MEPZ, represented 24 percent of GDP in 1998; it declined
to just 18.6 percent by 2006.
Although these figures indicate secular decline, closer analysis shows
that nuance may be required in interpreting the implications of these
trends for the future of the MEPZ. For example, evidence indicates that
the productivity of labor has not declined when measured through the
zone’s export intensity (exports and employment). As shown in figure
10.5, export intensity has increased steadily since 1987, although it
decreased during the early part of the boom. This suggests that efficiency
in labor utilization decreased as labor costs were low, given its abundance.
Data show the same trend when measuring the productivity of labor
through value added. It follows a curve closely aligned to that of export
intensity. The productivity of firms shows a similar trend.
Figure 10.4 Sectoral Share of Exports
100%
80%
60%
40%
20%
0%
1992 2000 2008
wearing apparel textile yarn and fabrics
food others
Figure 10.5 Exports per Employment
120,000
100,000
80,000
60,000
40,000
20,000
0
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
exports per employment, Rs, 1982 prices
Similarly, the export productivity of investment has shown resiliency, as

demonstrated in figure 10.6. This indicator experienced rapid decline in
1979–1981, remained low in the early part of the boom years, and subse-
quently recovered. It fell after 2000, but recovered from 2004 onward.
The government’s drive toward greater productivity (see box 10.1),
Figure 10.6 Measures of Export Productivity
35
30
25
20
15
10
0
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
exports per Rs invested
Box 10.1
Targeting Productivity Improvements in the EPZs

The government of Mauritius created the Export Processing Zone Development
Authority (EPZDA) in 1992 to support technology acquisition, skills development,
and efficiency improvement. EPZDA, together with the Mauritius Export Develop-
ment and Investment Authority (MEDIA), was absorbed in the Mauritius Industrial
Development Authority in 2000, replaced in 2005 by Enterprise Mauritius. Also, in
1999 the government launched the National Productivity and Competitiveness
Council (NPCC), a tripartite body whose goal is to “stimulate and generate produc-
tivity and quality consciousness and drive the productivity and quality move-
ment in all sectors of the economy with a view to raising national output and
achieving sustained growth and international competitiveness” (NPCC Act of
1999). In 2003, the government launched the Textile Emergency Support Team,
cochaired by government and business, and focused on restructuring the indus-
try through (1) productivity enhancements; (2) financial management and debt
restructuring; and (3) international marketing.
Source: Author.
which increased in 1992, clearly has had an impact as export intensity in

2008 was 2.4 times and the export productivity of investment was 3.4
times that of 1985.
Today’s Challenges
Current challenges to the export processing zone include (1) relatively
low and unstable FDI, (2) rising labor and operating costs, (3) increased
competition from LDCs in a liberalizing trade environment, and (4)
absence of an industrial sector capable of replacing apparels as an
employment-intensive alternative.
FDI
FDI has rarely exceeded 5 percent of GDP. Even during the MEPZ boom
years, it exceeded this mark only in 1990 and 1991. On the one hand, it
is possible, given the evidence that the presence of multinationals fosters
technology transfers, that this low attraction of FDI has affected the
performance of the MEPZ, and the island’s growth and development
path as a whole. On the other hand, it is possible that this lack of FDI has
exerted pressure on the government and the domestic sector to acquire
technology through other means, including contract manufacturing, joint
ventures, vocational training, and the acquisition of up-to-date produc-
tion technologies. This is supported by data. Indeed, although FDI has
been low, domestic private sector investment has never been below
15 percent of GDP since 1985 and has often been over 20 percent.
Cost Structure
Unlike many countries that have embarked on EPZ strategies, Mauritius
has not been aggressive in seeking to keep real wages low through labor
market and exchange rate policies. Mauritius’ wages were 25 percent of
those of Hong Kong, China, and Singapore in the early 1980s. They have
increased rapidly since then. For instance, wages in the EPZ more than
doubled between 1992 and 2004, although they remained lower than in
the rest of the economy. In 2002, Mauritius’ labor costs were significantly
higher than those of major apparel producers.6 To partly compensate, a
regional division of labor between Mauritius and Madagascar has devel-
oped since the 1990s, controlled by Mauritian firms.7 Labor costs in
Madagascar were one-third of those in Mauritius. This overseas expansion
of Mauritian firms has continued, with apparel groups operating in South
and East Asia.
From a competitiveness standpoint, Mauritius long benefited from

wise utilization of the preferential trade agreements it secured from the
American and European markets. It capitalized on the African, Caribbean
and Pacific Sugar Protocol from 1975 to September 2009, when it
expired. It also capitalized on the MFA, which expired in January 2005.
Although it actively opposed the end of these frameworks, it also sought
to prepare its industries for the new order, as well as its economy—notably
through productivity-enhancing measures and the launch of new sectoral
initiatives (such as the Cybercity and the conversion of least productive
sugar-producing lands to other uses). Nevertheless, the competitiveness of
Mauritius’ apparel industry has declined, notably for lower cost and
higher volume items. From 2003 on, the MEPZ lost some key foreign
investors and more than 25,000 jobs. Most of these investors transferred
their operations to China. The recovery of exports and investment in
2004, however, shows some resiliency as a result of markets diversifica-
tion, notably toward the European Union and regional markets like South
Africa and Madagascar.
Diversification
Efforts to diversify within the EPZ have had limited success, and the
zone’s core activities have remained largely concentrated on apparel.
Endeavors to increase textile manufacturing have born limited results.
Diversification has essentially taken place “outside” of the MEPZ, although
the fish-product sector, part of an expanding cluster called the seafood
hub, has shown remarkable growth. With an economic value added of
more than US$320 million in 2007, it combines activities such as licens-
ing and services of fishing vessels, aquaculture, exports of unprocessed fish
and processed fish, and more. Inside the MEPZ, the focus has been spe-
cialization and increased productivity. Most of the diversification has
taken place outside of manufacturing and processing altogether, particu-
larly in the growth of the services sector, including ICT services, financial
services, and the well-established tourism sector.
Although challenges exist, there is evidence of adjustment outside the
traditional MEPZ sector and of resiliency within it. This is supported by
Ancharaz’s (2009) detailed analysis of Mauritius’ revealed comparative
advantage against China for the island’s 10 main apparel exports for the
period 2000–2007. It managed to maintain competitiveness, and in some
cases to increase its competitiveness, in products like knitted T-shirts and
shirts, blouses, and shirt blouses. While other products have suffered, new
products have emerged. Thus, evidence indicates that the diversification
failure has been somewhat mitigated by the productivity gains and the
growth of Mauritian-owned companies that have attained autonomy
from the foreign companies they used to be partners with. Today,
Mauritius is the world’s second producer of knitwear, the third exporter
for pure wool garments, and the fourth supplier of T-shirts to the
European market.
The MEPZ and Economic Reform

Although the MEPZ started in the early 1970s and achieved impressive
results during its first decade, it rose to international prominence during
its “boom” time of the mid-1980s, attracting much policy attention and
becoming a valued subject of research and analysis. The question of the
relationship between the MEPZ and economic reform has also been well
researched, notably, since the late 1980s. The Mauritius case has attracted
the attention of distinguished institutions and economists, who have
explored this relationship both for the sake of assisting the island’s eco-
nomic development and that of deriving useful generalizations.
In considering the many assessments of the MEPZ, it is possible to
summarize the key question many researchers have attempted to
answer as follows: Was the MEPZ a manifestation of reform, or was it the
cause of it?
Setting aside the question of the cost benefit of the MEPZ and its
net contribution to Mauritius’ relatively rapid economic growth
(cf. Gulhati and Nallari 1990; Jaycox 1992; Sawkut et al. 2009; World
Bank 1989), perhaps the most important impact of the MEPZ was in
the political economic context, as a catalyst for reforms in the country.
For these perspectives, the EPZ is a manifestation of this export-
oriented strategy, formulated and implemented by a strongly develop-
mental state.
This export-oriented approach has been taken up by previous
researchers. For example, Kearney (1990) argued Mauritius’ economic
success could be attributed to its government having replicated the strat-
egy of the so-called newly industrializing countries (NICs), with policy
makers being “pragmatic, bold, innovative, and closely attentive to the NIC
experience” (Kearney 1990, 207), and the government being the coun-
try’s “leading entrepreneur.” To Meisenhelder (1997, 288), the export-
oriented strategy chosen by government cannot be reduced to structural
adjustment, but rather it represents an indigenous reform endeavor that
is the expression of the existence of a developmental state, characterized
by “a capable and relatively autonomous state bureaucracy . . . it was local

bureaucrats—with the help from academics and the Meade report—who
recognized the potential of export-led industrialization for the creation
of economic growth, and who used state authority and resources to
implement it.”
This theme of the Mauritius developmental state has been a regular
feature. Carroll and Carroll (1997) note the essential role of a competent
bureaucracy, capable of formulating policies (either in response to
demands or in anticipation of them), obtaining support, and implement-
ing them. Evidence of this is found in the political and legislative process
that established the MEPZ and described above in “The policy environ-
ment.” It is worth mentioning that the government—once Ramgoolam
was won to the cause—worked with little initial support from its own
ranks, including labor and business, and needed to address resistance to
the project. Particularly opposed to the EPZ solution were the sugar bar-
ons, who were at the helm of the largest sector of the economy, and the
virulent MMM, for different reasons. Although the first group was con-
cerned about the negative consequence of the EPZ on labor supply and
cost, the second opposed further inserting Mauritius within the interna-
tional capitalist system. In addition to convincing these groups that the
EPZ would “ultimately benefit all Mauritians” (Roberts 1992, 101), the
government had to win assent from the legislature.
In addition to its strategic role, government and the state apparatus
took a central role in implementing the EPZ and adapting it over the
years. As described by Bheenick and Shapiro (1991),
The government soon realized that it would have to strengthen the capacity
of the Ministry of Commerce and Industry to make the EPZ approach work.
To bolster its staff size and expertise, assistance was secured under bilateral
and multilateral foreign aid programmes. This facilitated the creation of new
cells for projects evaluation, monitoring, investment promotion, export mar-
keting, funding of projects, and provision of insurance to protect exporters
against defaults by importers. While foreign consulting firms were initially
used, they were replaced as soon as Mauritian authorities gained needed
experience. (264–65)
Measures taken included the creation within the Ministry of Industry

of an Industrial Coordination Unit in charge of simplifying the invest-
ment process in the EPZ, and later, MEDIA, a parastatal organization
whose mission was to promote exports, engage in investment promotion,
develop and operate industrial estates, and plan and implement export-
oriented manufacturing.
Dommen and Dommen (1994, 25) have argued that, in all, the choice
of export-oriented growth and its early implementation through the
MEPZ led to an increase in state involvement in economic management.
Although the Ramgoolam government of the 1970s was keen on leaving
“the choice of industry to the imagination of the private sector, limiting
Government’s role to setting the legal and policy environment, the
Jugnauth government has been willing to take initiatives in pointing
directions for the private sector.”
From this perspective, it is evident that the creation of the MEPZ rep-
resented reform: it constituted the principal policy instrument through
which the island transitioned from an import-substitution growth model
to a dual economic regime.
Although this is undoubtedly true, one should not overstate the case
of a “grand reform strategy.” As indicated in “The policy environment,”
the MEPZ was at inception a “problem-solving tool” given the specific
function of absorbing labor surplus within an economic (and political
economic) enclave. Evidence of that exists in the fact that the two
development plans of the period (1971–1975 and 1975–1980) do not
give any clear indication of a shedding of a replacement of import-
substitution with export-oriented growth. Furthermore, evidence is
provided by the fact that protection remained high. According to
Subramanian (2009),
During the 1970s and 1980s, Mauritius remained a highly protected econ-
omy: the average rate of protection was high and dispersed. In 1980, the
average effective protection exceeded 100 per cent, and although this dimin-
ished by the end of the 1980s, it was still very high (65 per cent). Moreover
until the 1980s, there were also extensive quantitative restrictions in the
form of import licensing, covering nearly 60 per cent of imports... An alterna-
tive scheme of classification that has been devised in the IMF ranked
Mauritius as one of the most protected economies in the early 1990s. (15)
This is a critical part of the story of the political economy impact of

the zones. MEPZs did not represent liberalization across the board;
rather, they coexisted with a strategy of import-substituting industrial-
ization. Indeed, this was the necessary political balance required to
appease the traditional industrial elites that opposed reform. As Rodrik
(2004) notes,
The creation of the EPZ generated new profit opportunities, without taking
protection away from the import-substituting groups. The segmentation of
labor markets was particularly crucial in this regard, as it prevented the
expansion of the EPZ (which employed mainly female labor) from driving
wages up in the rest of the economy, and thereby disadvantaging import-
substituting industries. New profit opportunities were created at the margin,
while leaving old opportunities undisturbed. (12)
If there was a grand reform strategy toward export-oriented growth, it

was piecemeal and pragmatic—spurred in part by the following:
• The structural reforms of the late 1970s and early 1980s.8 Restraints on
government expenditures and the reform of the incentive structure
played a key role in the post-1984 prosperity.
• The success of the nontraditional export sector (i.e., the EPZ). And this
strategy did not simply equate to lesser state intervention.
For Rodrik (2004), the island’s development path has represented an

incarnation of the transitional growth model combining “elements of
orthodoxy with unorthodox institutional practices,” a path shared with
the likes of China; the Republic of Korea; and Taiwan, China.
Conclusion
Static versus Dynamic Impact
Conventional economic assessments and cost-benefit analyses, while
useful in their own right, may be too narrow in their focus when trying
to assess the MEPZ situation. This is because they fail to quantify some
of the critical dynamic impacts that successful zones programs can
catalyze, particularly those involving political-economic processes of
reform.
Ultimately, it is speculation to imagine a counterfactual scenario for
Mauritius, but it is not counterintuitive to advance the hypothesis that
without the MEPZ, or with a “cheaper” MEPZ, or with an MEPZ with
higher wages in the 1970s and 1980s, it is probable that its growth rate
would have been lower. Beyond the reduced static impact, its dynamic
impact would have been less. This in turn would probably have had
negative consequences on the island’s overall strategy of diversification,
would have maintained high dependency on sugar, and may have led to
continuing Dutch disease, capital flights, and sociopolitical instability.
This is not to say that resources could not have been better utilized.
Evidence suggests that they could have been. But excluding the dynamic
perspective, the analysis thus misses the key point of the Mauritian
experience: the impact of the MEPZ on the island’s path from colonial
monoculture to a sustainable, diversified economy operating within the
international economic system achieving high rankings in political,
economic, and social governance. The zone has played an immense role
in the secular transformation of the island, attracting FDI, generating
massive technology transfers, integrating Mauritius into global commodity
chains, and leading the way toward the creation of a series of growth
poles (the Freeport, the International Banking Center, the Integrated
Resort Scheme, the Cybercity, the new SEZ, etc.) whose combined effect
has been enormous.
Also of fundamental importance has been the contribution of the zone
to political stability, through the provision of employment and the cre-
ation of a “virtuous cycle” of growth and development. Overall, the
MEPZ has acted as an important contributor to transforming the island
into Africa’s premier country in many comparative rankings. It has con-
sistently ranked first in the Mo Ibrahim Index on African Governance. It
has topped the World Bank’s Doing Business Index in Africa, improving its
global position to 17 in 2010. The social benefits of these changes have
been enormous, and some part of these benefits is directly and indirectly
imputable to the MEPZ.
The Long-Term View

Indeed, the MEPZ represents one phase in the island’s secular path, but
it is one that has been critical to its long-term development. The island’s
economy has experienced four principal phases in its economic history
since the mid-19th century: (1) export-oriented colonial monoculture
(before the mid-1950s); (2) a mix regime of import substitution and
export monoculture (between the mid-1950s and circa 1981); (3) export-
led growth (between circa 1981 and circa 2005); and (4) toward the open
economy, the “duty-free island” initiative (since circa 2005).
The latest strategy represents a radical break with the previous para-
digm that provided a set of sector-specific special regimes and associated
infrastructure while the domestic economy remained relatively protected
by tariff barriers, quotas, restrictions on investment and activities, and a
relatively high tax burden. This evolution aims at turning Mauritius toward
the Singapore and Hong Kong, China, model, in which the entire economy
creates a low-tax environment acting as a trade, financial, tourism, and
specialized-manufacturing platform. This latest restructuring is critical, as

the new international trading order and the global recession have affected
Mauritius hard: the national growth rate has been below 5 percent for
three consecutive years for the first time in a generation.
This restructuring is progressive, with tax and trade measures being
implemented slowly. One such policy has been the harmonization of the
tax regime, whereby EPZ and domestic corporate tax rates have been
aligned at 15 percent. Another is trade policy, through which the average
tariff has decreased from 19.9 percent in 2001 to 6.6 percent in 2007.
In the intervening period, however, tariffs have increased for some com-
modities manufacturing in Mauritius.9
As for the future, it is likely that even as the world economy recovers
the apparel industry will not return to Mauritius in the numbers observed
in the past. Although this will present a significant challenge, adaptation to
changing international conditions is in the makeup of the MEPZ, and the
relative decline of the zone has been integrated into government policy
and private sector strategy. Thus, while the size of the MEPZ will continue
to decline in absolute and relative terms, it will increase its focus on spe-
cialized and high-end products, with Mauritian firms continuing to lead
the way. If it is unlikely that other sectors of the MEPZ will compensate
for the decline in firms and employment, sectors outside of the MEPZ will
partially do so. For instance, the food-processing industry has experienced
significant growth. So, too, have financial services, whose share of GDP has
been more than 10 percent since 2003. This is more than tourism.
Some will see in the relative decline of the MEPZ proof of its nonsus-
tainability, but this decline also may be interpreted as the very proof of
its success. The MEPZ will have achieved the secular role it was assigned
in the early 1980s, following its unexpected growth in the 1970s. The
MEPZ it will have played a key catalytic role at two levels: (1) it fostered
high private domestic investment in export-oriented nontraditional
manufacturing, which resulted in a dynamic private sector opened to the
world economy and investing in foreign countries (including in EPZs and
SEZs) to maintain its competitiveness; and (2) it encouraged the govern-
ment to commit to further economic diversification and progressively
open the economy to trade and investment. China’s choice of the island
as a location for one of its five African Trade and Economic Cooperation
zones is testimony to its unique position in Africa.
It is worth quoting Subramanian (2009):
In the face of these challenges, the question often posed is: what will Mauritius
do next? What industries or services will replace the inevitable decline of
sugar and clothing? While these may be interesting questions, they are almost
certainly the wrong ones for outsiders to ask. The key point is that Mauritius
has reached a stage of development and maturity and sophistication that, long
before the outside world had even recognized the looming challenges, the
Mauritian domestic system had started the necessary processes to confront
them. Whether Mauritius upgrades into high-value added financial services or
information technology (this is already happening), one can be confident that
Mauritius will figure out a way. The world can, in fact, stop worrying about
Mauritius because it has demonstrated the ability to worry for itself. (22)
Notes
1. Political parties did and continue to have either English or French names,
depending on their main constituencies and sources of ideological inspiration.
MMM used Creole, and not French, as its political language.
2. The 1971 4-year Plan for Social and Economic Development, 1971–1975, the first
of a long series of such plans, explicitly recognized the limited impact and scope
of ISI: “Industrialisation, apart from the processing of agricultural crops—sugar
and tea—for export, has been almost wholly geared to meeting the require-
ments of the small domestic market and therefore limited in scope” (pp. v–vi).
3. The governing coalition of the MLP and PMSD confronted the MMM from
1971 on with expansionary social spending on the one hand and repression
on the other, declaring a state of emergency that was lifted only in 1975. At
the time, the MMM was calling for the nationalization of the sugar industry
and radical social changes.
4. The prices used here are constant prices, based on 1982 value in Mauritian
rupees. Although this provides a “real” perspective into the performance of
the zone, it significantly undervalues its performance at current prices.
5. No data are available for 1973–1976 constant prices.
6. According to the Economist Intelligence Unit (cited by Ancharaz 2009),
Mauritius labor costs in the clothing industry were US$1.25 per hour, versus
US$0.39 in Bangladesh, between US$0.68 and US$0.88 in China, US$0.77
in Egypt, US$0.38 in India, US$0.38 in Kenya, US$0.33 in Madagascar,
US$2.45 in Mexico, US$1.38 in South Africa, and US$0.48 in Sri Lanka.
7. In 2000, it was estimated that two large Mauritian firms, Floreal and CMT,
employed 9,000 workers in Malagasy EPZ factories.
8. Bowman (1991, 122) advanced that “the sustained commitment of the
Mauritian government and the political opposition to the structural adjustment
program set the stage for a resounding economic performance in the middle
and late 1980s.”
9. Footwear, apparel, sugar products, and beverages, for instance.
References
Ancharaz, V. 2009. “David V. Goliath: Mauritius Facing Up to China.” European
Journal of Development Research 21 (4): 622–43.
Bheenick, R., and M. O. Shapiro. 1991. “The Mauritian Export Processing Zone.”
Public Administration and Development 11: 263–67.
Bowman, L. 1991. Mauritius: Democracy and Development in the Indian Ocean.
Boulder, CO: Westview Press.
Carroll, B. W., and T. Carroll. 1997. “State and Ethnicity in Botswana and
Mauritius.” The Journal of Development Studies 33 (4): 464–86.
Dommen, B., and E. Dommen. 1999. Mauritius: The Roots of Success.
A Retrospective Study, 1960–1993. Oxford, UK: James Currey.
Government of Mauritius. 1999. National Productivity and Competitiveness Act
1999. Act No. 9 of 1999, 14 May, 1999.
Government of Mauritius. 2010. Mauritius Productivity and Competitiveness
Indicators: 1999–2009. Port Louis: Central Statistical Office.
Gulhati, R., and R. Nallari. 1990. Successful Stabilization and Recovery in Mauritius.
Jaycox, E. V. 1992. “Sub-Saharan Africa: Development Performance and
Prospects.” Journal of International Affairs 46 (1): 81–95.
Kearney, R. C. 1990. “Mauritius and the NIC Model Redux: Or, How Many Cases
Make a Model?” Journal of Developing Areas, 24 (2): 195–216.
Meisenhelder, T. 1997. “The Developmental State in Mauritius.” The Journal of
Modern African Studies 35 (2): 279–97.
Paturau, J. M. 1988. Historie economique de I’ile Maurice. Port Louis: Le Pailles.
Roberts, M. W. 1992. Export Processing Zones in Jamaica and Mauritius. Evolution
of an Export-Oriented Model. San Francisco: Mellen Research University
Press.
Rodrik, D. 2004. Getting Institutions Right. CESifo DICE Report, Cambridge, MA:
Harvard University.
Sawkut, R., V. Sannassee, and S. Fowdar. 2009. “The Net Contribution of the
Mauritian Export Processing Zone Using Cost-Benefit Analysis.” Journal of
International Development 21: 379–92.
Subramanian, A. 2009. The Mauritian Success Story and Its Lessons. UNU-WIDER
Research Papers No. 2009/36. Helsinki: UNU-WIDER.
World Bank. 1989. Mauritius, Managing Success. Washington, DC: World Bank.
PA R T I I I
Social and Environmental

Sustainability: Emerging Issues for SEZs
CHAPTER 11
The Gender Dimension of Special

Economic Zones1
Sheba Tejani
Introduction
It is impossible to discuss the full developmental and social consequences
of SEZs2 without considering the gender dimension. Women constitute
more than 50 percent and in some cases 90 percent of employment in
SEZs in developing countries. Given such high levels of female employ-
ment in SEZs and the important role of SEZs in developing-country
exports, we can fairly conclude that export-oriented industrialization
over the past 30 years has been a distinctly gendered process. The pur-
pose of this chapter is to describe and explain the remarkable degree of
“feminization”3 of work in SEZs in the recent era of export-oriented
industrialization. The following section discusses the scholarly literature
on trade and the feminization of labor. The third section offers a synthetic
theory of feminization, building on the extensive research on industrial
upgrading in global value chains. The fourth section reviews the evidence
of the female intensity of SEZ employment. The fifth section presents the
main characteristics of the quality of female employment in SEZs, and
the sixth section attempts to explain recent trends of the defeminization
of labor in manufacturing. The final section discusses the policy implica-
tions of the analysis and concludes.
247
Background on Trade and Gender

The link between trade openness and gender was first made when women
were drawn into paid employment in manufacturing in unprecedented
numbers in Puerto Rico, Ireland, and the East Asian first-tier NICs as they
pursued export-oriented growth in the 1960s and 1970s. As these coun-
tries promoted light, labor-intensive manufacturing industries, such as
textiles, clothing, leather, and footwear in EPZs, the female share of
employment rose in may cases to well over 70 percent, a much higher
proportion than in the economy as a whole. Later, as developing countries
in Southeast Asia, South Asia, Latin America, and Eastern Europe
adopted export-oriented industrialization, trade expansion became
strongly associated with a demand for female labor. Industrialization in
low-income countries was characterized as both “female-dependent as
well as export-led” (Joekes 1999, 36; also see Joekes 1995). Kusago and
Tzannatos (1998), for instance, report the high proportion of female
labor in SEZs in the Republic of Korea, Malaysia, Mauritius, Philippines,
and Sri Lanka in the late 1980s and early 1990s. Joekes (1999, 35) sums
up the situation: “In effect, in developing countries, new job openings
for women have been dependent on the expansion of production for
exports, and formal sector manufacturing employment opportunities
for women in developing countries are now concentrated in production
for exports.”
In fact, it was argued that trade liberalization, rising international
competition, and labor deregulation had led to a “global feminization
of labor” in which women were being substituted for men across sec-
tors and employment categories (Standing 1989, 1999). A number of
other studies confirmed these findings of a positive correlation between
greater trade openness or export orientation and the feminization of
labor (e.g., see Cagatay and Berik 1990; Cagatay and Ozler 1995; Ozler
2000; Wood 1991).
Many of the women employed in export-oriented manufacturing were
previously agricultural or informal workers, such as in East Asia, or were
entering the labor force for the first time as in Latin America (Horton
1999). Although the wages they earned might have been lower than men,
paid employment allowed women relatively stable access to cash income
that otherwise might not have been available in the informal or agricul-
tural sector. Women’s entry into export-oriented manufacturing thus has
been described as a double-edged and contradictory phenomenon, in
which some structures of gender inequality have eroded even as others
The Gender Dimension of Special Economic Zones 249
have been constructed anew (Elson 2007, 8). Evidence indicates that
access to paid employment increased women’s self-confidence and asser-
tiveness and led to an improvement in their influence and standing in the
household (Jayaweera 2003, cited in Elson 2007; Kabeer 2000; Zhang
2007). Factory employment afforded women opportunities to exit the
sphere of familial control as well as situations of domestic violence, to
gain financial independence, and to expand their personal autonomy and
life choices. But social norms dictate that women do not always control
the income they earn, and paid work adds to the household work for
which women assume primary responsibility, leaving them less time for
rest and leisure. Besides, women generally remained confined to low-paid
and low-productivity activities in export-oriented manufacturing that
had harsh working conditions and few opportunities for advancement.
These issues are explored further below.
Reasons for the Feminization of Labor 4

What are the reasons for this feminization of export-oriented produc-
tion? One view is that the gender wage gap5 has led to a high demand for
female labor in an environment of rising international competition. Early
observers commented that firms preferred women for export-related
production because they provided cheap labor and because gender stere-
otypes attributed women with dexterity (“nimble fingers”), docility, and
submissiveness—traits that employers considered desirable for labor
intensive work (Elson and Pearson 1981).6 Standing (1989, 1999) claimed
that employers seeking to expand exports hired women to lower labor
costs in the face of severe international competition, to raise flexibility in
response to fluctuations in product demand, and to minimize the bar-
gaining power of workers on issues of working conditions, overtime,
workplace safety, and collective bargaining.
More recently, Seguino (2000a) has shown the gender wage gap to be
particularly relevant to the rapid export and GDP growth of East Asian
countries for the period 1975 to 1995.7 She shows in some detail that
“[l]ow female wages have spurred investment and exports by lowering
unit labor costs and providing the foreign exchange to purchase capital
and intermediate goods which raise productivity and growth rates”
(Seguino 2000a, 27). In a cross-country study, Busse and Spielman (2006)
find that gender wage inequality is positively correlated with comparative
advantage in labor-intensive production or that countries with a higher
gender wage gap have higher exports of such goods. Mitra-Kahn and
Mitra-Kahn (2007) report that the relationship between gender wage
inequality and growth for 20 developing countries is nonlinear: during

the early stages of export-oriented (and labor-intensive) industrialization,
wage inequality is positively related to growth, but at later stages, it may
hurt growth. Ghosh (2002, 20) argues that the feminization of labor in
East Asia was highly dependent on the “relative inferiority of remunera-
tion and working conditions” of women. As evident in table 11.1, a sub-
stantial gender wage gap still exists in the manufacturing sector in many
countries, although it has mostly narrowed over time.
Apart from the gender wage gap, gender norms and stereotypes
segment workers into particular types of economic activities on the basis
Table 11.1 Female Wages as a Percentage of Male Wages in Manufacturing

Country 1985 1990 1998 2001
Transition Economies
Bulgaria 73 706
Georgia 63 63
Hungary 695 736
Latvia 88 84
Asia
Hong Kong SAR, China 69 61 65
Malaysia 49 50 634
Myanmar 99 96 1125
Republic of Korea 47 50 56 58
Singapore 55 58 59
Sri Lanka 70 88 83 86
Indonesia 92
Philippines 80 90
Thailand 642 72
Latin America
Costa Rica 74 74 80 816
El Salvador 81 94 75 92
Brazil 511 54 59 61
Mexico 71 70
Middle East
Bahrain 83 62 45 445
Egypt, Arab Republic of 68 68 69 75e
Jordan 62 57 60 68e
Sub-Saharan Africa
Botswana 54 526
Kenya 76 73 48
Swaziland 72 88 873
Source: UNCTAD (2004), table 5; expanded by author using ILO (2009).
Note: 1 = 1988; 2 = 1991; 3 = 1995; 4 = 1997; 5 = 1999; 6 = 2000.
of sex and contribute to the feminization of export-oriented production.

The segmentation of occupations by sex remains a pervasive and global
phenomenon.8 Mechanisms such as the gender-typing of jobs as “mascu-
line” or “feminine,” differentiating the abilities and roles of workers on the
basis of sex during recruitment and promotion, and devaluing the work
done by women both create and reproduce social hierarchies in the work-
place. Thus, the belief that women are dexterous, docile, and unsuitable
for “heavy” or technical work leads to their recruitment in labor-intensive
activities that have lower pay and fewer opportunities for advancement.9
Gender hierarchies that elevate males to “breadwinner” status while
designating females as secondary income earners also confine women to
low-wage and insecure jobs while placing men in positions with better
prospects (Seguino, Berik, and Rodgers 2010, 6). Women have rapidly
closed the gender gap in education at the primary and secondary level so
the argument that they lack the necessary skills to perform in higher skill
occupations is not a sufficient explanation for this segmentation (for an
exploration of this issue, see Tejani and Milberg 2010). Instead, persistent
discrimination against women in the labor market is the more likely
explanation.
The argument can then be made that export-oriented industrializa-
tion became female dominated because its sectoral composition was
low value added and labor intensive, which lent itself to the segmenta-
tion of work by sex. This is confirmed by Caraway (2007, 155) who
shows that feminization in the aggregate is the result of the balance of
employment between labor- and capital-intensive sectors in manufac-
turing and that early export-oriented industrialization was female inten-
sive because it was labor intensive. In fact, the segmentation of women
within labor-intensive export industries, in which the price elasticity of
demand is high, can keep women’s wages artificially low by restricting
their bargaining power (Seguino 2000b, 1214). Historically, too, the
feminization of labor has been associated with a downgrading of status
and pay in such professions as clerical work (Horton 1999, 574), nurs-
ing, and teaching.
In sum, the feminization of SEZ production is attributed to three
broad factors in the literature: women’s relative “cheapness” owing to the
gender wage gap, rising international competition, and gendered norms
and stereotypes that segment work by sex and assign women to low-skill
and low-paying work.
Finally, we focus here on the impact of gender inequality on trade to
explain why export-oriented production has been female intensive,
although the causality can run in both directions in the literature. A number
of studies find that increasing trade openness leads to a fall in gender

inequality (see Black and Brainerd 2004; Brainerd 2000; Gray, Kittilson,
and Sandholtz 2006; Oostendorp 2004), whereas others find that it hurts
women in terms of employment, wages, and education (see Baliamoune-
Lutz 2006; Berik, Rodgers, and Zveglich 2004; Chamarbagwala 2006;
Kongar 2007; Kucera and Milberg 2000; Menon and Rodgers 2008).
The Role of SEZs

Where do SEZs fit in this picture? The purpose of SEZs is to generate
employment, attract FDI and new technology, provide foreign market
access, and earn foreign exchange through the expansion of exports.
The attractiveness of traditional EPZ models to foreign (and in some
cases domestic) firms were the elimination of tariffs on imported inputs
and exports, low or zero taxation of profits, and the provision of a less
stringent regulatory environment with respect to labor laws or at least
their relaxed enforcement (Milberg and Amegual 2008, 7). Women
were the “unintended beneficiaries”10 of early zone development in
Puerto Rico and Ireland. These countries were among the first to
experiment with the export growth model and explicitly oriented their
industrialization plans to reduce male unemployment, with Ireland
legally requiring at least 75 percent male employment in all new invest-
ments, a condition that eventually had to be dropped (Caraway 2007,
19). The Border Industrialization Program that created maquiladoras in
Mexico was also initially established to generate employment for male
agricultural workers returning from the United States to northern
Mexico (Caraway 2007, 19). Ironically, in all three cases, zone employ-
ment became highly female-intensive.
In subsequent SEZ promotion, however, governments actively sought
and facilitated the hiring of women for light manufacturing jobs (Caraway
2007, 20; Lutz 1988), including publicizing the virtues of “oriental
female” workers in investment brochures (Elson and Pearson 1981, 93)
and ensuring that their wages remained low. As Salzinger (2003, 10, 11,
15) argues, official and global corporate rhetoric at the time firmly estab-
lished the “trope of productive femininity” in the labor-intensive indus-
tries of SEZ production, so that the feminized East Asian model was
deliberately emulated in other countries. This trope of productive femi-
ninity has currency to this day, as SEZs, which continue to specialize in
light manufacturing, also remain largely female dominated.
As SEZs have upgraded their productive activities over time, how-
ever, their female intensity of employment has tended to decline. This
decline highlights the fact that the feminization of employment is a

historically specific and contingent phenomenon in which women
tend to predominate in some occupations during particular periods in
time.11 Some other limits to the feminization of labor include worker
resistance, including the actions of male-dominated unions that seek
to exclude women from formal employment,12 a closing gender wage
gap that may result in a falling demand for female labor, and the will-
ingness of males to accept “feminized” or insecure, low-paying and
flexible positions (in this regard, see Barrientos, Kabeer, and Hossain
2004, 6).
The Economics of Female-Intensive Production in SEZs

In this section, we develop a more general argument about the role of
women in SEZ employment, by linking feminization to the changing
structure of world trade that has occurred with the evolution of global
value chains (GVCs). Production has become increasingly fragmented
and internationalized, with different activities being carried out in dispa-
rate locations and coordinated increasingly through GVCs. Kaplinsky
(1998, 13) describes a GVC as “the full range of activities that are
required to bring a product from its conception, through its design, its
sourced raw materials and intermediate inputs, its marketing, its distribu-
tion and its support to the final consumer.” The rapidly growing share of
intermediate goods in world total merchandise trade is evidence of this
phenomenon. For the period 1988 to 2006, world trade of total merchan-
dise tripled (grew by 300 percent), while the intermediate goods compo-
nent of total merchandise trade quadrupled (grew by 400 percent)
(WTO 2008, chart 13, 102).
But what drives a firm’s decision to subctontract? Milberg (2004,
60–61) suggests that firms engage in arm’s-length subcontracting, rather
than intrafirm trade, when the expected cost savings from the former
exceed rents from internalization, which is more probable when inter-
mediate product markets are, or can be made, highly competitive.13
Fostering downstream competition allows lead firms to shave supplier
margins, keep supply conditions flexible, and transfer risks onto produc-
ers, perpetuating asymmetric market structures that distribute value
added across the chain in a highly skewed fashion.14 When externaliza-
tion itself fosters competition among suppliers, the asymmetry of market
structures can be considered endogenous to the lead firm’s strategies
(Milberg 2004, 61).
SEZ policies have no doubt spurred this trend of externalization

among transnational firms by offering the institutional set-up in devel-
oping countries within which costs can be kept low. But developing
countries are integrated into GVCs at the low value added segment
and “tend to have the most commodified, fragmented and cost-driven
portion of the production system,” whereas lead firms situated mostly
in industrial countries retain the high value added segments (Gereffi
2005, 47). This asymmetry persists over time for a number of reasons:
significant entry barriers at higher ends of the chain, capital mobility
and the credible threat of firm exit when costs (including wage costs)
rise, and low tariffs (especially through SEZs) (Milberg 2004, 67).
Despite the notable success of first-, and to a lesser extent, second-tier
East Asian NICs in upgrading industrially,15 most SEZ production
remains concentrated in textiles and electronics (Milberg and Amengual
2008). In fact, the entry of a large swathe of developing countries into
these low value added activities has led to a “fallacy of composition”
effect (Milberg and Amengual 2008, 27), resulting in a flood of
imports into industrial countries and rapidly falling prices16 (Gereffi
2005, 12). The fact that developing countries still face falling terms of
trade despite having switched to manufactures to avoid the commod-
ity trap that Prebisch (1950) and Singer (1950) warned of approxi-
mately 60 years ago is perhaps emblematic of the global asymmetry in
trading relations.17
How is gender implicated within this asymmetrical market structure?
Given their position in GVCs, producers in developing countries are
under great pressure to deliver high-quality products at low cost and
under tight shipping deadlines to lead firms (Barrientos 2001, 5). With
just-in-time delivery systems and seasonal demand peaks, GVCs also
demand a high degree of supply flexibility on the part of producers. The
feminization of labor in SEZs plays a critical role in meeting the demands
of lead firms in GVCs and protecting their rents by providing a relatively
cheap and flexible source of labor for suppliers. As Barrientos (2001, 8)
points out, producers located at the weakest positions in the value chain
hierarchy are the most likely to use female labor to deal with the risks of
price fluctuations and supply volatility. Gender discrimination crowds
women into the low value added segment of the chain and puts them in
the position of effectively absorbing those risks. Thus, a link exists
between the asymmetry of market relations between lead firms and sup-
pliers in GVCs and the segmentation of women in labor-intensive indus-
tries generally located in SEZs. Although employment in GVCs can
provide women much-needed income-earning opportunities, the

structural import of gender segmentation within the value chain hierarchy
cannot be denied.
Because of women’s position within the structure of GVCs, they are
particularly vulnerable to fluctuations in export demand and job loss. In
the present crisis, female workers who form part of the flexible workforce
in labor-intensive industries have been particularly hard-hit with the
decline in exports in apparel, footwear, and electronics (Sirimanne
2009, 6). The segment of export activity in which women are concen-
trated is also highly competitive: China’s low unit costs in apparel have
seriously undermined the industry in Mexican maquiladoras (Sargent and
Matthews 2008) with the result that female intensity in EPZ employ-
ment has markedly declined. A number of low-income countries, includ-
ing some in Africa, have experienced a decline in export output with the
end of the MFA, with many low-skilled female workers losing jobs as a
result (ILO 2005).
Evidence on Gender in SEZs

Exports and Employment
As mentioned in chapter 1, there has been a virtual explosion of SEZs in
developing countries since 1975 with the most rapid expansion taking
place in the last 20 years. In 2006, 130 countries operated 3,500 zones
and employed roughly 66 million people around the globe, with China
alone employing 60 percent of all workers (Boyenge 2007). More
recently, India passed a controversial SEZ law that is estimated to add
another 250 zones and 150,000 workers to that number (Murayama and
Yokota 2008, 23). At the same time, zone models have expanded from
being manufacturing assembly-type operations to ones that are dedicated
to services such as high-tech, finance, logistics, and even tourism (ILO
2008, 2). SEZs are being used to capture markets in business services, IT,
and IT-enabled services in countries that have higher skilled workforces,
such as India, Russia, and China, although they are not particularly
employment intensive (Milberg and Amengual 2008, 7). In terms of
scope, SEZs might be enclave type or focused on a single industry, such
as jewelry or leather; focused on a single commodity, such as coffee; or
house only a single factory or company (ILO 2003, 2).
Table 11.2 presents zone exports as a percentage of total exports for
2002 and 2006 for a selection of countries. Zone exports account for a
bulk of total exports for most of the countries reported. Countries such
Table 11.2 SEZ Exports as a Percentage of Total Exports

Country 2000 2006 Change (Percent points)
Philippines 87 60 –27
Malaysia 83 83 0
Mexico 83 47 –36
Kenya 80 87 7
Gabon 80 80 0
Macao SAR, China 80 80 0
Zimbabwe 80 80 0
Vietnam 80 80 0
Dominican Rep. 80 80 0
Tunisia 80 52 –28
Mauritius 77 42 –35
Morocco 61 61 0
Bangladesh 60 76 16
Costa Rica 50 52 2
Haiti 50 50 0
Madagascar 38 80 42
Sri Lanka 33 38 5
Cameroon 32 33 1
Maldives 13 48 35
Colombia 9 40 31
Source: Boyenge (2003, 2007).
Note: The global crisis that started in 2008 has significantly affected export volumes in some of these countries.
as Bangladesh, Madagascar, Colombia, and the Maldives experienced a

significant expansion of zone-related exports even during this brief
period, whereas the Philippines, Mexico, Tunisia, and Mauritius experi-
enced the reverse trend. Employment in SEZs also expanded moderately
in Bangladesh, Malaysia, Honduras, and Nicaragua, while it stayed stable
in most other countries except for Mexico, Sri Lanka, and the Dominican
Republic (see table 11.3). Despite the rapid expansion of zones, in most
regions, direct employment in SEZs does not account for a significant
proportion of total employment globally at 0.2 percent (Engman,
Onodera, and Pinali 2007, 29). However, their social impact can be sig-
nificant in pockets of unemployment or underemployment (Engman,
Onodera, and Pinali 2007, 29), as well as in smaller countries such as
Bangladesh, Sri Lanka, and Mauritius, where the SEZ share of total
employment is substantial (Aggarwal 2007, 7). In China, the growth of
SEZ employment alone contributed to 49 percent of total employment
growth from 1995 to 2005 (ILO 2008, 5), highlighting the strategic use
of zones in generating employment in the country.
Table 11.3 Total Employment and Female Share of Employment in SEZs
2000–2003 2005–2006 Change over the period

Total
Total Percent Total Percent employment Female
Country employment female employment female (%) share (%)
Bangladesh 2,138,341 62 3,438,394 85 0.6 23
Mexico 1,906,064 60 1,212,125 60 –0.4 0
Philippines 820,960 74 1,128,197 74 0.4 0
Sri Lanka 461,033 78 410,851 78 –0.1 0
Malaysia 322,000 54 491,488 54 0.5 0
Dominican
Republic 181,130 53 154,781 53 –0.2 0
Honduras 106,457 67 353,624 75 2.3 8
Guatemala 69,200 70 72,000 70 0.0 0
Nicaragua 40,000 90 340,000 90 7.5 0
Korea,
Republic of 39,000 70 39,000 70 0.0 0
Malawi 29,000 51 29,000 51 0.0 0
Kenya 27,148 60 38,851 60 0.4 0
Jamaica 20,000 90 20,000 90 0.0 0
Panama 14,900 70 18,000 70 0.2 0
Haiti 10,000 69 10,000 69 0.0 0
Cape Verde 1,141 88 1,180 88 0.0 0
Source: Boyenge (2003, 2007).
SEZs remain highly female intensive in general with countries such as

Bangladesh, Jamaica, and Nicaragua displaying a female share of employ-
ment close to 90 percent. For the period 2000–2003, the average female
share of employment in SEZs in the sample of countries in table 11.3
was 69 percent; this increased slightly to 71 percent because of a rise in
the number of women employed in Bangladesh and Honduras in 2005–
06. When compared with the share of female employment in nonagricul-
tural employment, the high female intensity of SEZs is all the more
revealing (see figure 11.1) and the segmentation of women in export-
related employment is quite starkly evident. In countries such as Bahrain
and Morocco, the female share of employment is low in comparison to
other regions, although it is still high relative to female nonagricultural
employment; a fact explained by sociocultural norms that keep female
labor force participation there low. In India, female employment in SEZs
has shown a declining trend from 1981 (46.5 percent) to 2003 (36.9
percent), although it is still much higher than formal sector employment
Figure 11.1 Female Share of SEZ Employment and Nonagricultural Employment,

2005–06
Nicaragua
Jamaica
El Salvador
Bangaladesh
Sri Lanka
Honduras
Philippines
Madagascar
Panama
Korea, Republic of
Mauritius
Mexico
Malaysia
Dominican Republic
Macedonia
Belize
Morocco
0 10 20 30 40 50 60 70 80 90
female share of SEZ employment
female share of nonagricultural employment
Source: Author’s illustration, based on Boyenge (2007) and ILO (2010).

for women in the economy (Aggarwal 2007, 20–21). Some authors attri-
bute the low proportion of women in Indian SEZs to the willingness of
male workers to take up the same positions (Murayama and Yokota 2008,
25). Although the exact proportion of women working in SEZs in China
is not available, Fu and Gao (2007, 33) find that the share of female
employees in foreign-funded enterprises (most of them situated in SEZs)
has fluctuated between 50 and 55 percent from 1995 to 2005, while the
Figure 11.2 Female Share of SEZ Employment and Nonagricultural Employment

in African Countries, 2009
Kenya
Lesotho
Tanzania
Senegal
Ghana
Nigeria
0 10 20 30 40 50 60 70
female share of SEZ employment
female share of country non-agricultural employment
Source: World Bank 2009–10.

ratio of female to male workers employed in all enterprises dropped from

40 to 36.5 percent during the same period. Ngai (2004, 30) reports that
young migrant female workers accounted for around 90 percent of work-
ers in light manufacturing industries in the Shenzhen SEZ.
Figure 11.2 presents more recent data on the female intensity of SEZs
in African countries separately. Zones in Kenya, Lesotho, and Tanzania are
female dominated with the median shares of female employment at
around 60 percent. Ghana and Nigeria are noteworthy in that they are
the only two countries in our sample for which the female share of
employment in SEZs is lower than that in nonagricultural employment
as a whole.
Sectoral Distribution of Female Employment

As mentioned earlier, the predominant exports from SEZs are textiles,
garments, electrical, and electronic goods (Cling and Letilly 2001, 12;
ILO 2003, 3), which explains their continuing female intensity.18 The
distribution of women’s employment across SEZs in 10 countries,
including six in Africa, shows a clear pattern in figure 11.3: Women
Figure 11.3 Female Share of Employment in SEZs by Sector, Select Countries, 2009
garments
electronics
other manufacturing
textiles
food & beverages
services
metal & metal products
wood, paper & wood prods.
chemicals
0 20 40 60 80
female share of employment

Note: The countries across which data are pooled include Bangladesh, Dominican Republic, Honduras, Ghana,
Kenya, Lesotho, Nigeria, Tanzania, Senegal, and Vietnam.
predominate in light industries that are gender-typed as female, such as

garments, electronics, and textiles, while their share of employment is
reduced quite starkly in chemicals, wood products, and metals. The lack
of comprehensive statistics on female employment disaggregated by sec-
tor and industry in SEZs globally poses a challenge, although case studies
provide ample evidence at the country or SEZ level of the concentration
of women in particular activities.
In general, women tend to predominate in the low-paying and low
value added segment of export production. In Madagascar, for instance,
64 percent of the enterprises in SEZs were in the textiles and clothing
industry and they engaged a workforce that was 71 percent female (ILO
2005, 47). Similarly, in Bangladesh, the female share of employment in
the garment industry of the Dhaka EPZ was 72 percent, while it was
23 percent in the nongarment industry (Zohir 2001, 13). In Sri Lanka,
76 percent of the female respondents in a survey of EPZs were employed

in garments or textile factories and a similar proportion were engaged in
low-status positions, such as machine operators, packers, and helpers
(Hancock, Middleton, and Moore 2009, 15). Cling and Letilly (2001, 13)
report that employment in textiles and clothing in SEZs comprised
77 percent of employment in Tunisia, 66 percent in Sri Lanka, 55.5 per-
cent in Mauritius, and 49 percent in Madagascar in the mid-1990s.
Electronic goods predominate in SEZ production in relatively higher
income countries, such as the Republic of Korea; Taiwan, China; Malaysia;
and Mexico (Cling and Letilly 2001, 13), where they also form a high
proportion of female employment. In terms of occupation, women gener-
ally have generally been concentrated in low-skill, assembly-type jobs in
SEZs, while their share of managerial positions has been relatively much
lower, as seen in figure 11.4.
Figure 11.4 Female Share of Employers and Managers, Select Countries, 2009
Lesotho
Dominican Rep.
Senegal
Kenya
Ghana
Tanzania
Nigeria
0 10 20 30 40 50 60 70
female share of managers

female share of permanent employees

Quality of Female Employment in SEZs

Flexibility of Employment
Employment in export industries has provided women previously
unavailable formal earning opportunities, especially in China, where
young female workers who flock to the cities in search of work have
earned the epithet of “factory girls” (Chang 2008). In many cases, espe-
cially for low-skill workers, no alternate employment opportunities were
available, such as in the Vishakhapatnam SEZ in India (Aggarwal 2007,
19), or self-employment did not provide a stable source of income even
though it paid more (Fussell 2000). Yet, the irony is that even this form
of “stable” formal employment has been flexible and informal to a degree.
In the Shenzhen Zone in China, young female migrant workers lack the
right to stay in the city and cannot be classified as formal workers no mat-
ter how long they have worked in the zone. They remain classified as
peasant workers and have “ambiguous citizenship rights and weak bar-
gaining power” (Ngai 2004, 30).
In fact, formal employment in the zones has layers of informality. In
the Noida EPZ in India, employment conditions and wage levels
resemble those of the urban informal economy (Murayama and Yokota
2008, 29), whereas in the Madras EPZ, female workers are paid wages
far below the minimum wage. Fu and Gao (2007, 32) find that the
number of development zones in China has a strong correlation with
the share of informal employment in different regions. In addition,
recruitment in SEZs is not always a formal process, and the rights of
workers with respect to recruitment and dismissal are not always
respected (ILO 2008, 5, 6). Employees in zones also tend to have a
high rate of turnover with an average career of no more than five years
because of the use of fixed-term contracts and the intensive nature of
work (ILO 2003, 7).
Wages and Working Conditions

SEZs have been created as islands of duty-free, tax-free export-oriented
production in developing countries, but they were also known to offer a
more relaxed environment with respect to labor regulation to attract
foreign investment. Labor laws within SEZs now appear to be the same
as in the rest of the country, although some countries such as Algeria,
Cameroon, and Mauritius have exceptions in their national legislation
with respect to issues such as overtime, wages, and duration of work in
SEZs, while others, such as Djibouti, Panama, and Zimbabwe, have
different labor laws altogether (ILO 2008, 7). Still, in an ILO (2001)
survey, approximately 28 percent of respondents in 19 countries reported
that laws within SEZs differed in some way from those outside, including
more overtime work, lack of retirement provisions, less favorable leave
terms, exemption from occupational safety provisions, and prolonged
temporary contracts (cited in Engman, Onodera, and Pinali 2007, 30).
Although there has been some movement forward in harmonizing laws
within and outside zones, the main problem in SEZs remains government
indifference toward the enforcement of laws and the lack of resources or
capacity for monitoring and supervision (Milberg and Amengual 2008,
58–9). For instance, Vietnam’s labor laws, which were drafted in consulta-
tion with the ILO, include the strongest protection for workers’ rights
and for gender equality in the region, but the lack of enforcement and
monitoring means that many of those provisions simply remain on paper
(Farole 2010).
We present some general characteristics with respect to work and
working conditions in SEZs, although considerable variations exist
between countries, zones, and industries. First, SEZs offer higher or simi-
lar wages and benefits as compared with other sectors of the economy,
but the gender wage gap as well as other forms of discrimination persist.
Second, SEZs are characterized by much longer and frequently illegal
working hours as compared with other sectors of the economy (Milberg
and Amengual 2008, 61). Third, the rights to freedom of association and
collective bargaining are seriously impaired (ICFTU 2004). We will dis-
cuss each by turn as well as discuss gender-related concerns.
Based on country studies, the ILO (2008, 6) reports that wages in
SEZs appear to be at the same level or higher for equivalent work in the
rest of the economy. Studies on Bangladesh, Madagascar, Costa Rica,
Honduras, and Sri Lanka indicate that wages in zones generally tend to
be higher than in sectors outside zones, although which control group is
being used for the comparison is critical (for a summary, see Milberg and
Amengual 2008). However, wage and nonwage discrimination against
women is a continuing reality within SEZs (ILO 2008, 4).19 This is the
case for, instance, in SEZs in Honduras where women earn less than men
for comparable work (Ver beek 2001) and in Madagascar where the
average female wage is lower than the male, with the gap rising from
8 percent for low-skill work to 20 percent for managerial positions (ILO
2008, 4). In Bangladesh, women not only earned less than men because
of their segregation in low-skilled work, but more women also left their
jobs for reasons of low pay than did men (Zohir 2001). The question
remains as to whether employers in SEZs provide workers with a livable

wage even if they do comply with minimum wage laws (Milberg and
Amengual 2008, 35).
Excessive overtime appears to be an endemic feature of employment
in SEZs. Overtime work is often mandatory because of the requirements
of GVCs, seasonal demand peaks, and stringent shipping deadlines.
Refusal to comply with long hours of work can result in dismissal or
retaliation (ILO 2008, 6). In Madagascar, female employees in the zone
worked for 209 hours in a month on average, as compared with 168 hours
in the non-EPZ private sector and 147 hours in the public sector (Glick
and Roubaud 2006). Based on the Fair Labor Association’s workplace
code of ethics, garment factories display the most number of violations
with respect to hours of work, overtime compensation and wages20 fol-
lowed in second place by noncompliance on health and safety codes
(Rodgers and Berik 2006, 62).21
Perhaps the most critical issue with regard to employment in SEZs,
and one that has a bearing on all the others, is the restriction of the right
to freedom of association and collective bargaining. Although most coun-
tries legally recognize the rights of workers to join unions, severe limita-
tions are frequently placed on these rights in practice. Workers are
unable to organize effectively due to the discrimination and harassment
they face from employers when they engage in union-related activities,
including unfair dismissal and suspension, blacklisting of union members,
and even physical violence (Gopalkrishnan 2007, 1). It is also difficult in
many cases for existing unions to gain physical access to firms and work-
ers inside SEZs (ILO 2003, 8) and repression of union-related activity is
widespread, as studies on Dominican Republic, Guatemala, Jamaica, and
Sri Lanka have shown (Milberg and Amengual 2008, 33).
Gender-based discrimination in SEZs also comes in the form of hiring
and benefits, career development, and women workers’ rights in relation
to working hours, pregnancy, maternity leave, and children (ILO 2003, 9).
Firms in SEZs have displayed a tendency to employ young, unmarried
women and to discriminate against married women and women with
children, although the profile of SEZ employees has changed to some
extent over time. Mexico is an infamous example of firms in SEZs requir-
ing women to take pregnancy tests before recruitment, a practice that
was eventually prohibited by law (ICFTU 2004, 12). This practice still
appears to be in force in the Dominican Republic; however, in the
Philippines, women have been made to resign after becoming pregnant
and have not been allowed to return to work subsequently (ICFTU
2004). There are frequent reports of sexual harassment and abuse22 in

SEZs and even mandatory HIV screening requirements in some cases
(ICFTU 2004).
Some Initiatives to Improve Compliance on Labor Issues in SEZs

Different efforts have been made to address some of the persistent
problems with respect to the quality of employment in SEZs as well as
to enhance compliance and monitoring of labor laws. They have enjoyed
varying degrees of success. We briefly present three noteworthy initiatives
here.
Under the U.K. Ethical Trade Initiative and the U.S. Apparel Industry
Partnership, both multistakeholder initiatives, lead firms in the North
have adopted voluntary codes of conduct to work with suppliers that
observe certain minimum labor standards, which has helped improve
labor conditions in some value chains (see Barrientos 2000; Smith and
Barrientos 2005). For instance, in Lesotho, working conditions in textiles
and clothing factories improved notably as global buyers imposed codes
of conduct on suppliers and monitored their enforcement in factories
(Farole 2010). Still there are limits to private and voluntary regulation
and monitoring and they cannot be a substitute for broader developmen-
tal strategies that address issues of labor law compliance in supplier coun-
tries (Barrientos 2000, 559).
To improve compliance on social and labor issues, the Bangladesh
Export Processing Zones Authority (BEPZA) initiated a Labor Counselor
Program in 2005 by which it recruited 67 counselors to pay visits to fac-
tories within the EPZ and to work with management on the correct
implementation of labor laws and compensation practices. Perceived
more as facilitators rather than regulators, the counselors also arbitrated
informally between workers and management and reported existing
problems to the BEPZA. It is reported that better implementation of the
law through the program led to a 32 percent increase in the wages of the
workers and to fewer worker grievances (Farole 2010).23
The ILO runs a well-known Better Factories Programme in Cambodia
through which it monitors the compliance of garment firms on national
labor laws and international core labor standards. It publishes the findings
of the ILO monitors and gives firms a chance to improve their compli-
ance, after which it conducts a reevaluation and identifies by name the
firms that do not remedy their violations in publicly available reports
(Milberg and Amengual 2008, 38). Because the reports are available
to international buyers who are making sourcing decisions, it acts as a
pressure point for producers to comply (see www.betterfactories.org for

more information on this program). Berik and Rodgers (2010) find that
the program has achieved modest improvements in working conditions in
garment factories in the country.
Defeminization of Employment
The link between export orientation and the feminization of labor has
been critiqued and refined by researchers who argue that it is not export
orientation per se, but rather the type of manufacturing that takes place
within these sectors that matters for female employment. As we have
seen, an overlap exists between the types of industries located within
SEZs, the quality of employment in terms of low wages and flexibility,
and the female intensity of employment. This raises the question of
whether the gains in women’s employment are sustainable over time and
what factors contribute to the defeminization of labor that has been
noted in some countries.24 A number of reasons have been identified in
the literature for this defeminization, including industrial upgrading,
closing of the gender wage gap, cyclical factors such as recessions, and
outsourcing to home-based workers, which leads to statistical defemini-
zation. We will consider each of these in turn bearing in mind that one
or more of these factors might be acting to produce the given outcome
at any time.
Industrial upgrading can be defined as the ability of producers “to
make better products, to make products more efficiently, or to move
into higher-skilled activities” (Pietrobelli and Rabellotti 2006, 1) and
studies on upgrading generally tend to focus on the technological con-
tent of production and on value added (Milberg 2008, 6).25 For our
purposes, the shift of output to more capital- and technology-intensive
sectors as well as the production of higher value added products within
a sector can have implications for the distribution of employment by
sex for a number of reasons. First, as described earlier, the gender-typing
of jobs as masculine and feminine leads to discrimination against women
when industrial upgrading involves heavy, capital-intensive, or skilled
work. Second, women lack access to on-the-job training and retraining
to upgrade their skills when the skill requirements of the job change.
This is partly due to their segmentation in what is considered unskilled
work and partly because employers view women as “unstable workers,”
who will withdraw from the labor force as domestic obligations mount
(Jayasinghe 2001, 72, 73). Third, gender biases operate to segment
young women and girls into more “feminine” vocations in the education
system, while reserving the heavy, technical, and often better-paid pro-
fessions for men.
Thus, Fussell (2000, 65) notes that as production became more
technologically intensive in Mexican maquiladoras between 1983 and
1999, the number of female operatives declined from 77 percent to
41 percent, although total employment in maquiladoras grew rapidly
during the period. Jomo (2009) identifies the rise of skill-intensive
manufacturing and the likely gender-typing of new industrial jobs as the
reason for defeminization of export-oriented manufacturing in North
and Southeast Asia in the 1990s. Jayasinghe (2001, 77), in a study on the
Caribbean, explains the predominance of male export workers in
Trinidad by the fact that its major exports were minerals, fuels, and
chemicals and work in these industries was considered heavy and more
skilled. Further, because the few women who are employed are concen-
trated in low-skill processing jobs, where labor costs are of critical
importance, they are rapidly losing employment as a result of mechani-
zation. Caraway (2007, 149) finds a statistically significant and negative
relationship between capital intensity and female employment in manu-
facturing for a sample of countries in East Asia and Latin America from
the late 1950s to mid-1990s.
Tejani and Milberg (2010) find that both the defeminization of labor
in manufacturing in Southeast Asia and the feminization of labor in Latin
America over the period 1985 to 2006 are driven by shifts in manufactur-
ing labor productivity and capital intensity. As proxies for industrial
upgrading, both capital intensity and labor productivity have a statisti-
cally significant and negative relationship with the female intensity of
employment in manufacturing over the period. Figure 11.5 reproduces
the relationship between the female intensity of employment and manu-
facturing productivity for relevant countries.
Other scholars have argued that the feminization of labor “creates
conditions for its own unravelling over time” because the wage differen-
tials that drive feminization tend to decrease over time as the labor mar-
ket tightens and demands for better work conditions and security gain
momentum (Ghosh 2002, 25). That is, the demand for female labor is
contingent on its relative cheapness; once this incentive to hire women
disappears, firms prefer to employ men. Murayama and Yokota (2008,
16–17) attribute the steady decline of the female share of employment
in the Masan SEZ in the Republic of Korea from 85 percent in 1972 to
62 percent in 2001 to massive worker resistance led by young female
Figure 11.5 Female Intensity of Manufacturing Employment and Manufacturing

Value Added per Worker, Average Annual Growth, Southeast Asia and Latin
America, 1985–2006
3
growth of female intensity in Mfg (%)
2.5
2 Brazil
1.5 Peru Venezuela, RB
Panama
1 Colombia Argentina Thailand
Mexico
El Salvador
0.5 Ecuador Costa Rica
Chile
0 Dominican Republic
Philippines
Indonesia Malaysia
–0.5
–1
–4 –3 –2 –1 0 1 2 3 4 5 6
growth of Mfg. value added per worker (%)
female intensity and MVA per worker
Source: Authors’ illustration, based on ILO (2009) and World Bank (2009).
Note: MVA = manufacturing value added.
Fitted Line: Y = 0.86 – 0.13X (Adj. Rsq.= 0.24; t-stat = –2.38).
Data availability varies by country. Please contact author for details.
workers in the late 1980s, which led to rapid wage increases across the
board. Additionally, the rise of capital- and technology-intensive produc-
tion in the zone displaced female workers who were employed in labor-
intensive industries. Similarly, as the supply of female workers willing to
work for low wages in Mexican maquiladoras in the 1980s boom fell
because of a tightening labor market, managers were forced to recruit
men for the same jobs (Salzinger 2003, 11).
Rubery (1998) argues that female employment is procyclical and that
women act as a flexible “buffer” labor force to be roped into the work-
force when required and released when not. The buffer explanation
implies that women are employed in larger numbers in periods of expan-
sion and are laid off during recessions, providing one explanation for
defeminization. Such a buffer role is concentrated in particular occupa-
tions in industries that face competitive pressures and greater demand
fluctuations. Kucera (2001) shows this buffer role of female workers in
the 1960s and 1970s in Germany and Japan.26
The defeminization of labor in SEZs could be related to the greater

informalization of work and outsourcing to home-based workers as a
result of the cost pressures on suppliers that are integrated into GVCs.27
In the fashion garments chains, for instance, suppliers outsource the work
to intermediaries who hire mostly home-based, and largely female, work-
ers for the job. Thus, women who were formerly employed in SEZ facto-
ries now could be located in the informal sector and working for lower
wages with no benefits, outside the ambit of regulatory structures and
unrecorded in labor force surveys (Carr, Chen, and Tate, 136). Thus,
defeminization in this case is a statistical artifact and the result of pro-
ductive activities of home-based workers going unrecorded. We discuss
some policy measures to address defeminization in manufacturing in the
concluding section.
Conclusion and Policy Implications

Without doubt, export-oriented industrialization has created new
opportunities for women by drawing many into paid employment for
the first time. The high degree of female intensity in light manufactur-
ing industries in SEZs attests to this fact. Women have, at the same
time, served as a source of competitive advantage for firms competing
in the international market because of (1) a persistent wage gap that
makes women a cheaper source of labor and (2) a high degree of occu-
pational sex segmentation that perpetuates the wage gap. Within the
framework of GVCs, this segmentation by sex serves the asymmetry of
market structures between lead firms situated in the rich countries and
producers in poor countries and distributes value added in a highly
skewed fashion.
Because women’s employment has been contingent largely on their
disadvantages in the labor market, rather than the abatement of gender-
based discrimination, the gains made in the initial phases of export-
oriented industrialization might not be sustainable. There is clear evidence
of a defeminization of export labor in countries that have upgraded their
industrial structures and, in some cases, where the gender wage gap has
closed.
The feminization of SEZ labor has been a double-edged phenome-
non: it has provided women jobs and access to income that has earned
them other kinds of freedom, but these jobs have been poorly paid and
insecure; they have generally not led to promotion; and when countries
have upgraded their industries, they have hired fewer women. SEZ work
remains highly segmented with women crowded in a few industries in

low value added, assembly-type operations with conditions of work that
include long working hours, impediments to the freedom of association,
sexual harassment, and other forms of gender-based discrimination.
These conditions have severely limited the gains that could have other-
wise been made.
Further, with the scaling up and expansion of the SEZ model to incor-
porate a variety of activities, including information processing, financial
services, and logistics among others, the gender dimension of employment
in the zones is likely to be affected. In service-oriented SEZs, the nature
of work and skill profile of workers is expected to be quite different from
the traditional EPZ model, which involves mostly blue-collar work.
Women have generally benefited in terms of employment gains from the
increasing share of services in output (see GET 2009), but evidence sug-
gests that service activities also tend to be segmented by gender. Mitter
(2003, 10–13) finds that women predominate in the low-skilled seg-
ments of IT and IT-enabled services in a number of developing countries.
Kelkar, Shrestha, and Veena (2002, 70–71) also highlight the segmenta-
tion of women in low-skilled jobs in the IT-enabled service industry in
India, such as in call centers and medical transcription centers. In a study
of firms engaged in high-tech production in the Philippines, McKay
(2006, 231) predicts that women will have little access to the high-skilled
jobs that are finally being created in the industry as a result of entrenched
gender norms.
What policy conclusions do we draw from these developments? The
policy implications for SEZs can be inferred at two different levels: (1)
protecting the rights of all workers in the zone and (2) addressing the
various forms of gender-based discrimination that women workers face in
particular. Perhaps the most important step in this regard would be to
remove existing barriers to the right of freedom of association in SEZs so
that workers can engage in collective bargaining and can organize to
access the full range of their rights. Because trade unions have tradition-
ally been hostile to the inclusion of gender concerns, this will require a
change in their culture and a larger role and voice for women. National
labor laws also need to be brought in line with international labor stan-
dards to raise standards for all workers in general.
Given that zones cover a limited geographic area and generally are
governed by a centralized zone authority, they can be used to spearhead
innovative labor reforms that can serve as models for the rest of the coun-
try. The ILO’s Decent Work Programme, which promotes fundamental
rights at work, social security, social dialogue, and tripartism, can be

implemented within an SEZ as a pilot initiative. Such proposals have
already been made in the case of Sri Lanka and Indonesia (see
Sivananthiram n.d.). For targeted interventions in persistent problem
areas, the ILO’s Factory Improvement Program has enjoyed success in
enhancing productivity and reducing overtime work in factories in Sri
Lanka and Vietnam and has led to broad gains in job quality (Milberg and
Amengual 2008, 56). The zone authority can enforce more regular labor
and gender audits within the zone area by obtaining support from other
stakeholders, including international agencies and local NGOs, and take
steps to build the capacity of firms to properly implement labor laws, as
the Labor Counselor Program did in Bangladesh in 2005. Furthermore,
to address the vertical gender segmentation evident in export-oriented
employment, zone authorities can stipulate targets for women’s repre-
sentation in supervisory and managerial positions in SEZ firms and can
undertake affirmative action policies to promote women entrepreneurs
within the zone. Providing accessible childcare and schooling facilities,
creating proper mechanisms to handle sexual harassment complaints, and
enforcing equal remuneration legislation and maternity or paternity leave
can address some of the persistent problems with respect to gender
discrimination in SEZs.
It is important for policy makers to recognize that although industrial
upgrading is a laudable policy goal to promote economic growth and
development, it has gender consequences. National programs that pro-
mote upgrading and diversification of exports must address this gender
dimension. Steps must be taken to update women’s skills through on-the-
job training programs to ensure advancement and retention when indus-
tries upgrade their products or processes. Zone authorities, along with
other stakeholders, can cofinance or offer firms partial rebates for training
schemes for higher-skilled positions that mandate the participation of
women. The ComMark Trust funded such an initiative in the textile and
clothing industry in Lesotho and successfully increased the participation
of Basotho workers in supervisory positions (see Farole 2010). Zone
authorities can institute awards to spotlight firms that have integrated
women into technical, high-skilled, or traditionally masculinized work to
generate incentives to change social norms and make these firms more
attractive to international buyers. Further, governments need to actively
promote institutions that reduce gender segmentation in the labor mar-
ket. Because segregation begins in the educational system, addressing
systematic biases in admission policy and instruction so that women have
better access to technical education and vocational training would be a

step in this direction.
Finally, the present financial crisis and the collapse of export demand
in the European Union and United States reveal some of the pitfalls of
pursuing export-oriented growth, and rising levels of international trade
liberalization undercut some of the incentives to establish SEZs in the
present environment (see Cattaneo, Gereffi, and Staritz 2010). It is
important in this context to improve the quality of work for women,
even as their role in the late-20th-century wave of industrialization
inevitably shifts.
Notes
1. The author is greatly indebted to William S. Milberg, Professor and Chair of
Economics, New School for Social Research, who provided valuable inputs
and advice at every stage of this paper. Thanks are also due to Tom Farole and
Cornelia Staritz, who provided helpful comments on an earlier draft. Any
errors or deficiencies remain the sole responsibility of the author.
2. I use the generic term special economic zone or SEZ to denote a wide variety
of free zones, including export processing zones, free trade zones, and wide
area zones using the typology outlined in chapter 1 of this book. Most SEZs
remain concentrated in manufacturing-related activities, although services
increasingly are being incorporated into the model.
3. Feminization here refers to the rising share of female employment in total
employment.
4. This section draws partially on Tejani and Milberg (2010).
5. Or the ratio of female to male wages for similar work.
6. In what came to be known as the “international division of labor” literature,
scholars argued that cheap female labor in developing countries was not just
incidental in a system of global production, but pivotal to ensuring transna-
tional profits and competitiveness. An entrenched system of gender subordi-
nation lay at the heart of women’s relative disadvantage in the labor market,
which firms seized on to make profits. Further, it was argued, the gendered
division of labor in the patriarchal household provided a blueprint for wom-
en’s integration into the labor market, confining them to low-paid, labor-
intensive work (Elson and Pearson 1981; Fernandez Kelly 1989).
7. See Seguino (2000b) for the impact of gender inequality on growth through
the channel of exports and investment for a group of semi-industrialized
countries in Asia and Latin America from 1975 to 1995.
8. About one-half of the workers in the world are in occupations that can be
classified as “male” or “female” based on the fact that at least 80 percent of
workers therein belong to a single sex. Further, not only are male-dominated
occupations much more numerous than female, the latter “tend to be less
valuable with lower pay, lower status and fewer advancement possibilities as
compared to ‘male’ occupations” (Anker 1998, 407).
9. But contrary to the belief that female workers are inherently compliant and
productive, Salzinger (2003, 10) contends that ideal workers are “produced”
through repeated invocation in managerial discourse and shop-floor practices
that employ gendered strategies to enhance productivity. Thus, female work-
ers do not innately display the required “feminine attributes” that can be put
to use in production, but rather, those attributes are elicited and performed
because they serve productive interests in the factory, with multiple possi-
bilities for disruption and resistance.
10. I borrow this term from Madani (1999), though I use it in a different spirit.
11. See Strom (1989) for a description of the process by which U.S. office work
became feminized in the early 20th century; also see Walsh (1997).
12. Caraway (2007, 133), for instance, highlights the role of unions in keeping the
female share of employment in manufacturing in Latin America tradition-
ally low.
13. In turn, firms will internalize production processes that protect rents accruing
from firm-specific and knowledge-based assets, which are possible to main-
tain only in an oligopolistic industry with firms that enjoy economies of scale
and market power (Milberg 2004, 60–1).
14. The structure of GVCs is by no means homogenous. See Gereffi, Humphrey,
and Sturgeon (2005) for the different forms of governance and Milberg
(2004) for an anatomy of cost markups and value added in GVCs.
15. Gereffi (1999) documents the shift from assembly activities to “full-package
production” and supplier-oriented production in developing countries.
16. For the rise in imports and precipitous decline in prices of clothing in the
United States, see Heintz (2006, 508).
17. Ironically, the current commodities boom means a complete reversal of the
Prebisch-Singer predictions.
18. This does not necessarily imply a lack of dynamism, however, as upgrading
can occur within an industry to full package production (Milberg and
Amegual 2007, 9) and to more technologically intensive products.
19. A recent meta-analysis of the gender wage gap showed that a fall in the
gender wage gap worldwide was due to the increased labor market productiv-
ity of females even as the discriminatory component of the wage gap held
steady (Weichselbaumer and Winter-Ebmer 2003).
20. China fares particularly poorly on this count as compared with Asia and other
regions (Berik 2006, 62.)
21. The recent fire in a garment factory in the Ashulia Industrial Zone in
Bangladesh that killed 25 people and injured more than a 100 is a grim
reminder of these poor safety standards (“Bangladesh Factory Fire Kills 25,”
December 15, 2010).
22. The ICFTU (2004) reports complaints of harassment in Bangladesh,
Dominican Republic, Kenya, and Mexico.
23. More recently, however, Bangladesh has been the site for great labor unrest as
garment factory workers in EPZs in Dhaka and Chittagong protested the fact
that firms have not implemented overdue pay hikes ordered by the govern-
ment. The protests turned violent as police clashed with the protestors lead-
ing to the death of three people and dozens of injuries (“Three killed, dozens
hurt in Bangladesh clashes,” December 12, 2010).
24. Barrientos, Kabeer, and Hossain (2004, 5) summarize declining trends in the
female share of employment for a number of countries.
25. In the GVC literature, upgrading can mean moving to a more advantageous
position in the chain by making higher value added products or performing
more valuable functions. And upgrading can include process, product, func-
tional, or intersectoral upgrading (see Milberg and Winkler 2008, 6–7, and
references therein).
26. On the other hand, downturns might motivate the search for cost-saving solu-
tions leading to the substitution of male workers with female workers and a
rising feminization of labor. In gender-segmented occupations, female employ-
ment would be related more to secular trends in sectoral structures rather
than to cyclical factors (Rubery 1988). It is beyond the scope of this chapter
to identify which of these hypotheses might be operating within a given
period of time, although they provide a useful framework for thinking about
defeminization.
27. See Chen, Sebstad, and O’Connell (1999) for a discussion of the limitation
of official statistics on the informal sector.
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CHAPTER 12
Low-Carbon, Green Special

Economic Zones
Han-Koo Yeo and Gokhan Akinci
Introduction
The climate change agenda has emerged as a core development challenge
of our time as it became obvious that countries cannot continue a devel-
opment paradigm of the past depending on heavy fossil-fuel and green-
house gas (GHG) emissions. Deep cuts in global emissions are required
to hold the increase in global temperature below 2 degrees Celsius (2°C),
and this will not be possible to meet without full participation by all the
countries.
There has been a growing consensus that all the countries have to
participate in global efforts to fight climate change in accordance with
the principle of “common but differentiated responsibilities and respec-
tive capabilities,” as clearly stipulated in the Article 3 of the United
Nations Convention on Climate Change. The Copenhagen Accord,
which came out of the Climate Change Summit in December and to
which more than 100 countries have committed, states in Article 5 that
developing countries will implement nationally appropriate mitigation
actions and shall communicate such actions.
To developing countries, development and climate change are two
interlinked challenges, neither of which can be sacrificed. These countries
283
have to lift 1.4 billion people out of poverty by building factories, power
plants, roads, buildings, and transport systems, while ensuring that they
comply with environmental sustainability and significantly reduce their
carbon footprints along the way. The Copenhagen Accord reflects such
need in Article 2, bearing in mind that social and economic development
and poverty eradication are the first and overriding priorities of develop-
ing countries and that a low-emission development strategy is indispen-
sible to sustainable development.
In this regard, exploring new ways to pursue low-carbon and green
growth, a new development paradigm, is a big task ahead. This new
development paradigm is meant to decouple economic growth from fur-
ther increases in GHG emissions. This paradigm also seeks to create jobs
based on the development and deployment of clean technologies. It is
important to come to a common understanding that shifting to a low-
carbon, green economy does not mean sacrificing competitiveness and
economic growth; but rather, is an investment in long-term sustainable
economic development.
Low-Carbon, Green SEZs: Overview

SEZs have played an important role in advancing industrial development,
attracting FDI, and creating jobs in developing countries for the last 30
years. As climate change agenda emerges as one of the core development
challenges, governments, developers, and companies around the world are
increasingly demanding that SEZs also contribute to environmental sus-
tainability and GHG mitigation. Governments like China and India
already are developing guidelines and policies for green zones, and many
others like the Republic of Korea and Thailand are focusing on systematic
development of eco-industrial parks.
In fact, in many countries, industrial zones are major contributors to
GHG emissions from manufacturing, energy generation and consump-
tion, buildings, and transportation. For instance, in the Republic of
Korea, about 650 industrial parks account for 63 percent of industrial
emissions in the nation, according to the Korea Industrial Complex
Corporation. This exemplifies the challenges as well as the opportunities
that SEZs face in addressing climate change. In other words, more than
3,000 SEZs around the globe can provide one of the best opportunities
to tackle climate change and reduce GHG emissions in a systematic and
measurable way.
Low-Carbon, Green Special Economic Zones 285
What Is a Low-Carbon, Green SEZ?

There has been a strong trend to develop more environmentally sustain-
able SEZs over time, reflecting the private sector’s increasing awareness
of and demands for environmental sustainability. Lately, as climate change
agenda adds more emphasis on the environmental dimension of SEZs,
similar terminologies, such as Pollution Control Zone, Environment
Compliance Zone, Eco-industrial Zone (Park), Low-carbon Zone, Green
Zone and others, are being used interchangeably without clear distinc-
tions. This section attempts to define “low-carbon, green SEZ” and identi-
fies its key attributes, within the spectrum of environmentally sustainable
zones (see figure 12.1).
The environment compliance zone or pollution control zone could be con-
sidered as an early stage form of zones in this spectrum. Its main empha-
sis is on the implementation of effective measures for pollution control
and environmental compliance, such as air pollution control, centralized
services for sewage and wastewater treatment, hazardous waste collection
and disposal, and environmental training programs for zone managers and
company operations. Implementation of environmental management
tools such as International Organization for Standardization (ISO) 14001
Environmental Management System (EMS) may be one of the systematic
programs to consider in these zones.
Eco-industrial zones (parks) goes beyond simple environmental
management to reduce the negative impact of pollution. This is a more
advanced concept in terms of environmental sustainability. Its purpose is
to manage the whole resource, energy, and environmental impact in an
Figure 12.1 Spectrum of Environmentally Sustainable Zones
low-carbon (green) SEZ
eco-industrial zone (park)
pollution control zone
efficient use of resources GHG mitigation & carbon

(reuse & recycling) footprint management
Source: Authors.
Note: GHG = greenhouse gases; SEZ = special economic zone.
integrated manner. The Eco-industrial Park Handbook (Ernest 2001)

developed by the Asian Development Bank states that “[a]n Eco-
Industrial Park is a community of manufacturing and service businesses
located together on a common property. Members seek enhanced
environmental, economic, and social performance through collaboration
in managing environmental and resource issues” (1). Therefore, eco-
industrial zones reuse and recycle resources within industrial zones and
clustered or chained industries, so that resources will circulate fully in the
local production system. Also known as industrial symbiosis, zone
networks are established between companies in the zone to exchange
waste from one company to another to be reused in another production
process.
Low-carbon, green SEZs is the most comprehensive and advanced con-
cept in terms of environmental sustainability. Pollution control and envi-
ronment management as well as reuse and recycling of resources in terms
of industrial symbiosis, are important ingredients of low-carbon, green
SEZs. However, this concept goes further to more actively manage carbon
footprint. Generally, low-carbon, green SEZs can be defined as SEZs that
are designed, developed, and operated in a low-carbon, green, sustainable
way, and hence they reduce the carbon footprint and effectively address
climate change mitigation in the process of their economic and industrial
activities in the SEZ. Some of the main attributes of low-carbon, green
SEZs include, but are not limited to, energy supply in part using renewable
energy sources; energy-efficiency measures, including use of energy-effi-
cient production methods for industries; construction of buildings and
factories using “green building codes”; waste-reuse and recycling systems
inside and outside the zone; promotion of climate-friendly investment into
the zone and clean technology R&D and deployment; and carbon finance
mechanisms that can be utilized to build the zone and many others.
Why Low-Carbon, Green SEZs?

Low-carbon, green SEZs build on the proven concept of SEZs, to play a
catalytic role by trying out new low-carbon, green measures in an SEZ set-
ting, and if proven valid, roll out into nationwide initiatives. Its clustering
of companies and industries in an SEZ could provide multiple advantages
not only to apply different components of a climate-friendly policy and
investment regime, but also to target existing zones or future zones. On
one hand, the low-carbon, green zone maximizes the effectiveness of envi-
ronmental infrastructure for industry, which otherwise could be expensive
for individual companies. On the other hand, single zone management for
hundreds of companies from a low-carbon, green perspective allows for a

huge synergy effect in various forms, such as the efficient use of low-carbon
management expertise, the steep learning curve, and peer pressure to do
what is right that does not exist outside the zone.
Low-carbon, green SEZs could be a useful platform to materialize a
low-carbon development strategy that developed and developing coun-
tries tend to have consensus on in international climate change negotia-
tions. It is expected that in the near future GHG emission from
developing countries will surpass that from developed countries. As SEZs
have effectively driven industrial development and growth in the devel-
oping world (but following an old, high-carbon development path), this
new trend of low-carbon, green SEZs could be a shortcut to achieve a
low-carbon development path in developing countries around the world
in a concrete and realistic way.
Low-Carbon (Green) SEZ Framework

Low-carbon, green SEZs can take many different forms across a wide
spectrum of countries. Low-carbon green, SEZs have five core compo-
nents (see figure 12.2):
• GHG Mitigation Target: The economic activities inside the SEZ are
aligned with concrete action plans for mitigation. As such, a low-carbon,
green SEZ can establish a goal and commitment to GHG mitigation at
the center of its overall strategy (e.g., SEZ-wide 30 percent reduction
Figure 12.2 Main Components of a Low-Carbon, Green SEZ Framework
mitigation
target
sustainable climate-friendly
infrastructure investment generation
LC-SEZ
low-carbon
carbon finance
policy framework
Source: Authors.
Note: LC-SEZ = low-carbon, green special economic zone.
by 2020, renewable energy mix of 15 percent). The first step is to

develop a baseline using basic GHG accounting rules and inventory
systems making it possible to monitor how much GHG emission comes
from which source and how much emission reduction potential exists
in each sector.
• Sustainable Infrastructure: Planning, designing, and building a zone infra-
structure using energy-efficient, resource-saving, and low-carbon meth-
ods would provide ample opportunities to reduce the carbon footprint.
Some sources for GHG reduction include renewable energy, energy
efficiency, green buildings, and a waste reuse and recycling system.
• Climate-Friendly Investment Generation: Low-carbon, green SEZs can
generate a streamlined and low-risk environment that fills in the gaps
in the national legal framework to attract new, climate-friendly invest-
ment and technologies. To do so, it is also important to develop relevant
investment promotion tools and methodologies to incorporate green
elements in terms of green business targeting, incentives, intellectual
property protection, and marketing strategy.
• Low-Carbon Policy Incentives and Regulations: Putting the right public
policy framework in place is a critical success factor for low-carbon,
green SEZs. Some best practices include eliminating trade and nontrade
barriers on climate-friendly products, instituting green building codes,
and establishing renewable energy or energy-efficiency laws (e.g., Brazil,
China, India), which introduce a feed-in tariff system, renewable port-
folio standards (RPS) and energy-efficiency standards, tax reduction for
green high-technology investment, and R&D support.
• Carbon Finance: A carbon finance mechanism, such as a clean develop-
ment mechanism (CDM), can provide the potential to channel new
source of funding to develop low-carbon, green SEZs in middle-income
as well as low-income countries.
GHG Mitigation Target

A low-carbon, green SEZ needs a clear goal and commitment to GHG
mitigation at the center of its overall strategy. Under the general direction
of a low-carbon development strategy, all the economic activities inside
the SEZ need to be aligned with concrete action plans for mitigation. A
mitigation goal can be set up in many different forms to accommodate
the different circumstances found in each SEZ. For instance, Incheon
Free Economic Zone in the Republic of Korea plans to set the goal of
achieving an SEZ-wide 30 percent reduction of GHG by 2020 com-

pared with its business-as-usual (BAU) scenario. A more ambitious target
could be an absolute amount of GHG reduction compared with the
emission level at a certain point in the past (e.g., 30 percent reduction by
2020 compared with its 2005 level). SEZs with a contained expectation
could consider more modest targets, limiting the scope and extent of the
target to certain sectors (e.g., 10 percent energy-efficiency improvement
by 2020, or 15 percent of power supply from renewable energy source
by 2020). In terms of time, the SEZ can set up a short-term (2015),
midterm (2020), or long-term (2050) target for more visible outcomes.
The first step to introduce GHG mitigation components into all parts
of the SEZ is to establish a GHG inventory system to monitor, report, and
verify how much GHG is being emitted from which sources, and to
determine how much GHG reduction can be achieved through what
kinds of methods from which sources (see figure 12.3).
The SEZ authority needs to develop a GHG inventory guideline,
referring to the GHG inventory guideline established by the
Intergovernmental Panel on Climate Change and other internationally
recognized institutions such as World Resources Institute, and verify the
Figure 12.3 Trajectory of GHG Emission and Mitigation Target
12
GHG emmissions
10 projections
8
GHG emissions
X% reduction
compared to BAU
6
0
2010 2015 2020 2025 2030
GHG emissions projection
BAU LC policy
Source: Authors.
Note: BAU = business as usual; GHG = greenhouse gas; LC = low carbon.
accuracy and credibility of such data. By nature, GHG emission data are
closely linked to energy generation and consumption data, which makes
integrated management of such data sets more efficient. Companies and
institutions above a certain level of annual GHG emission in an SEZ
should be required to monitor and report their GHG emission data on
an annual basis to the appropriate authority. According to the Copenhagen
Accord (Article 5), developing countries are supposed to communicate
mitigation actions, including national inventory reports, every two years.
The SEZ authority also needs to carry out an analysis of how much GHG
emission is projected by a certain point (e.g., 2020) according to its cur-
rent SEZ development plan (the base scenario) and to identify how
much GHG emission reduction potential exists in each sector through a
diverse set of mitigation measures (the policy scenario). Such analysis
may need top-down macroeconomic modeling exercises as well as
bottom-up surveys. Generally, most GHG emissions in an SEZ come
from energy consumption, such as electricity, heating, cooling, industrial
process, transportation, and water and waste disposal (see figure 12.4).
Figure 12.4 Example: Some SEZ GHG Emission Structures by Sector
5%
15%
30%
20%
30%
power generation
industry
buildings
transportation
waste
Source: Authors.
Note: GHG = greenhouse gas; SEZ = special economic zone.
Therefore, opportunities for GHG mitigation in an SEZ could lie in

renewable energy generation, energy efficiency and conservation, green
buildings, a sustainable transportation system, water and waste reuse, and
recycling systems.
Sustainable Infrastructure
Planning, designing, and building zone infrastructure in energy-efficient,
resource-saving, waste-recycling ways from the outset could provide
ample opportunities to reduce an SEZ’s carbon footprint. Energy supply
and demand, green buildings, and waste recycling systems are important
examples. Such infrastructure investment would be sustainable only
when medium- and long-term social and economic benefits surpass incre-
mental cost increases in the short term. For instance, making buildings in
China more energy efficient would add 10 percent to construction costs
but would save more than 50 percent on energy cost (Shalizi and Lecocq
2009). Integrated zero-emission building designs, which combine energy-
efficiency measures with on-site power and heat from solar power and
biomass, are technically and economically feasible, and their costs are fall-
ing (Brown, Southworth, and Stovall 2005).
First, in terms of energy supply infrastructure, providing some portion
of electricity through renewable energy is an important element of low-
carbon, green SEZs. To meet the 450 parts per million, 2°C goal, most
developing countries would need to boost their production of renewable
energy. It is important to identify suitable sources of renewable energy,
such as biomass, solar, wind, hydro, and geothermal, for certain SEZs in
the context of national circumstances. For instance, in India, wind power
would be one of easier options for SEZs, taking into account that the
nation has the fifth-largest installed wind power capacity in the world. As
a second-best option, when renewable energy is not readily available in
terms of technical or financial feasibility, even increasing the average effi-
ciency of coal-fired power plants can reduce GHG emission. For instance,
China has increased the average efficiency of coal-fired power plants by
15 percent over the last decade to an average of 34 percent. Replacing
small-scale coal-fired power plants with large-scale efficient plants over
the last few years reduced annual CO2 emissions by 60 million tons. An
SEZ could commit to a certain target for renewable energy supply, which
would be higher than the national average. According to India’s Guidelines
for Energy Conservation in SEZ (October 27, 2010), 100 percent of
organic waste generated within SEZs should be used for in-situ power
generation or vermi-composted, as applicable. Also, external lighting in
common spaces may comply with the requirement that at least 10 per-
cent of the installed load should be solar powered during the first year of
operation, and the installed load must be extended by at least 5 percent
annually until a target of 50 percent is achieved. The use of incandescent
lamps is not allowed. The Vision and Roadmap for Haiti (May 23, 2010)
prepared by the Private Sector Economic Forum of Haiti and presented
to the government of Haiti states that in five years, 15 percent of energy
needs to come from renewable energy sources, mostly in housing and
industrial parks.
In the short term, the largest and cheapest source of emission reduc-
tion is increased energy efficiency on both the supply and demand side
in power, industry, buildings, and transport. Energy efficiency offers the
biggest source (approximately 60 percent) of emission reduction,
according to the International Energy Agency. A range of measures can
be taken, from simply replacing road lights with energy-efficient light-
emitting diode lights (LEDs) to bringing new energy-efficient tech-
nologies to industrial processes and managing the load profiles of
individual industrial production. Some examples include energy-
efficient process equipment, industrial air conditioning, electrical power,
power transmission and distribution, heating and cooling of industrial
and commercial space, and lighting. For instance, in India, a large poten-
tial exists to reduce the 29 percent losses in transmission and distribu-
tion to a level closer to the world average of 9 percent, which will
smooth out peak demand and lessen the pressure to build more fossil-
fueled power plants.
Buildings provide good opportunities for GHG mitigation. For some
large-scale SEZs with many factories and commercial and residential
buildings, emissions from the building sector account for a considerable
portion of total emissions. Putting energy-efficient measures into the
design and planning stage, such as energy-efficient heating and cooling
systems, insulation, natural ventilation, and efficient lighting, could effec-
tively reduce emissions in a sustainable way. For existing buildings, a
dramatic change would not be possible; however, retrofitting some older
buildings into more energy-efficient buildings actually could make busi-
ness sense in that long-term energy saving would be greater than the
upfront investment (as seen in many of the recent retrofitting examples
in high-income countries). An appropriate set of incentive programs
could facilitate such investment. The SEZ authority needs to employ
administrative action programs, such as green building codes, that can be
enforced during the building review process to ensure that buildings
across the zone as a whole meet minimum standards and reduce the car-
bon footprint.
Waste reuse and recycling is a quick win through which companies
can reap the concrete benefits upon implementation. Recycling can be
done at the individual company level, but when it is done across multiple
companies in low-carbon, green SEZs, the benefits can be maximized. For
instance, a textile company, SAE-A Trading Co., installed an incinerator
in a Nicaragua factory to utilize regenerated heat energy. The company
completed combustion of fabric wastes and utilized steam generated by
heating water during the ironing process to generate energy, which helped
the company save energy costs and reduce GHG emission. The Republic
of Korea applies the industrial symbiosis concept to its industrial parks
(see figure 12.5). It transforms industrial parks into comprehensive and
collective networks of waste, energy, and information exchanges.
Figure 12.5 Example of Industrial Symbiosis Networking Map, Republic of Korea
Source: Ban, Young Un (2010).

In terms of infrastructure planning, design, and construction, these

actions and measures could be enforced during the master planning and
reviewing process at the initial stage of an SEZ. The role of the SEZ
authority is critical as a facilitator as well as a regulator to ensure that this
happens.
Climate-Friendly Investment Generation

When basic infrastructure such as roads, electricity, and water are com-
plete and ready, the focus turns to investment generation, which will
create business and job opportunities. To put it in a broader context of
current global climate change negotiations, the implication of a low-
carbon, green SEZ is quite significant. The Copenhagen Accord states
that developed countries commit to a goal of jointly financing US$100
billion a year by 2020 to developing countries with combined sources
from the private and public sector. This commitment means that a sig-
nificant portion of investment generation to mitigate GHG emission could
materialize in a setting like a low-carbon, green SEZ, considering that an
SEZ has a more favorable investment climate in developing countries. In
reality, such investment flows from developed to developing countries
could take the form of FDI. In 2007, FDI accounted for 12.6 percent of
the total gross fixed capital formation in electricity, gas, and water in
developing countries, which was three times the amount of multilateral
and bilateral aid (Brewer 2008).
There is an encouraging sign in the global market that the flow of
climate-friendly, low-carbon investment is rapidly increasing lately.
According to World Investment Report 2010 by UNCTAD, low-carbon
FDI is significant and its potential is huge.
The cost curve in figure 12.6 shows what actions or investment would
be most cost-effective in delivering GHG mitigation to fully capture
opportunities across sectors. The key issue would be how to make an
attractive investment environment to facilitate and generate investment
in diverse sectors to realize GHG mitigation opportunities.
Climate-friendly or green investment can be roughly defined as
investment aiming to increase the use of clean energy from renewable
sources, improve energy efficiency, or reduce the carbon footprint in the
production of products or provision of services. Investment in renewable
energy or energy efficiency is a good example. MNCs have invested mas-
sively in renewable industry of developing countries, such as photovoltaic
production in India (BP Solar), ethanol in Brazil (Archer Daniels Midland
and Cargill), and wind power in China (Gamesa and Vestas). According
Figure 12.6 Global Greenhouse Gas Mitigation Marginal Cost Curve Beyond 2030 Business-as-Usual
120 land-use and land-use change, mostly in developing

efficiency in buildings: advanced technologies:
100 countries: reduced deforestation, grassland
residential and commercial; carbon capture and storage
marginal mitigation cost ($/tCO2e)
80 building envelope, heat & water management, soil restoration, afforestation,

60 changed agronomy practices, livestock practices,
40 reduced intensive agricultural conversion
20
0
–20
small hydro and nuclear power
–40 in developing countries renewable energy: on- and off-shore wind,
–60 more efficeint motors; solar photovoltaic energy, concentrated solar power
–80 energy co-generation;
–100 electricity from landfill waste;
–120 gasoline plug-in hybrid engine
–140
negative costs: long-term savings
–160
outweigh initial costs
0 10 20 30 40
mitigation potential (GtCO2e/year)
marginal cost, all countries
mitigation measure in a developing country
mitigation measure in a high-income country
Source: World Bank, World Development Report 2010.

Note: The bars represent various mitigation measures, with the width indicating the amount of emission reduction each measure would achieve and the height indicating the cost,
per ton of avoided emissions, of the measure. Tracing the height of the bars creates a marginal mitigation cost curve.
295
to fDi Markets data (Brownell 2009), between January 2003 and August
2009, there have been more than 1,400 cross-border greenfield invest-
ment projects in renewable energy. In terms of energy-efficiency invest-
ment, energy service companies (ESCOs) could provide energy-efficiency
services (such as energy auditing), recommend energy-saving measures,
provide financing to clients, and serve as project aggregators. ESCOs are
not just limited to the high-income-country environment. In China, for
example, after a decade of capacity building supported by the World
Bank, the ESCO industry grew from three companies in 1997 to more
than 400, with US$1 billion in energy performance contracts in 2007
(World Bank 2008). Such investment in renewables and energy efficiency
is expected to grow as more developing countries race toward a low-
carbon development path. Conversely, investment in traditional indus-
tries such as steel, chemicals, and textiles can be “greened” by bringing in
more energy-efficient or clean technologies to reduce GHG emission and
by “greening” some parts of the value chain with low-carbon technologies.
For instance, a steel company, POSCO, is introducing a new eco-friendly
FINEX technology and processes in building a new steel plant in India.
FINEX, which POSCO has developed, is an environmentally friendly
iron-making process that allows the direct use of iron ore fines and non-
coking coal as feedstock. As a result, the emission of pollutants will be
drastically reduced, to levels of only 4–8 percent of traditional steel pro-
duction processes.
To institutionalize the carbon factor into the investment decision pro-
cess, the SEZ authority may require that all investment projects report
GHG emission estimation throughout the project life cycle. Currently, all
new real sector projects in IFC require GHG estimation before they can
receive approval.
Attracting green FDI could draw in domestic investors in this area,
developing further linkages with local suppliers. Clean technology
transfer and deployment is one of the most important issues enabling
developing countries to build capacity and fight climate change. In fact,
an attractive investment climate for FDI could be critical to accelerating
technology transfer and absorption (Goldberg, Branstetter, Goddard, and
Kuriakose 2008). The Copenhagen Accord (Article 11) emphasizes estab-
lishing the technology mechanism to accelerate technology development
and transfer. To maximize spillover of low-carbon technologies, low-
carbon, green SEZs could explore the “clean technology center” concept,
in which companies, local universities, and research institutes collaborate
to develop, transfer, and deploy clean technologies through a PPP model.
This kind of center can become a center of excellence for innovation,

knowledge sharing, and training for local companies and institutions. Such
initiatives need to be coordinated with national technology policies and
programs, and can pursue international collaboration in joint R&D with
public support from developed countries.
For effective investment promotion efforts, it is important to incorpo-
rate the green aspect into the investment promotion tools and method-
ologies that have been developed so far. These aspects include identifying
target industries and businesses through competitive market analysis,
developing coherent marketing strategies, and implementing marketing
campaigns, including investor relations activities. In many countries, how-
ever, such incorporation is not an easy task because most government
agencies dealing with climate change and energy policies are different
from those in charge of investment promotion and generation.
Low-Carbon Policy Incentives and Regulations

An integrated policy approach to providing an enabling business environ-
ment for low-carbon, green SEZs cannot be overemphasized. Putting in
place an appropriate set of public policies, including incentives and regu-
lations, is a critical success factor for low-carbon, green SEZs. In the early
stage of market development, the role of the public sector can make or
break the success of the project. The policy framework for low-carbon,
green SEZs can be categorized as basic, legal, regulatory, incentive, or
institutional (see figure 12.7). Some of these issues can be applied at
the SEZ level, whereas others need to be applied as national policy
initiatives.
Basic Policy Framework

Fostering an environment for free trade and investment should be
included in a basic policy framework. Eliminating trade and nontrade bar-
riers on climate-friendly products or services could be a strong merit of a
low-carbon, green SEZ. For instance, in Egypt, the average tariffs on pho-
tovoltaic panels are 32 percent, 10 times the 3 percent tariff imposed in
high-income member countries of OECD. In Nigeria, potential users of
photovoltaic panels face nontariff barriers of 70 percent in addition to a
20 percent tariff. Considering that the absorption of technologies nor-
mally occurs through imports of equipment, tariff barriers could restrict
local learning of these technologies. Conversely, low-carbon, green SEZs
need to apply the extraterritoriality principle—that is, they should
be treated as outside the domestic customs territory, but eligible for
Figure 12.7 Low-Carbon, Green SEZ Policy Framework
basic
institutional legal
low-carbon
framework
regulatory incentive
Source: Authors.
national certificates of origin and to participate in trade and market access

agreements.
To facilitate local capacity building and technology transfer, a weak
IPR regime could be an obstacle for middle-income countries. Weak IPR
enforcement discourages foreign subsidiaries from increasing the scale of
their R&D activities and foreign venture capitalists from investing in
promising domestic enterprises (Branstetter, Fisman, and Foley 2005).
Low-carbon, green SEZs could absorb foreign technologies and facilitate
technology cooperation with foreign companies by providing a more
predictable and stable IPR environment.
Legal Framework
Developing a conducive legal framework is fundamental to ensuring a
transparent and predictable business environment for SEZs as well as for
climate change mitigation. Currently, most countries with SEZ programs
have SEZ legislation in place, and many high-income and middle-income
developing countries have completed or are legislating comprehensive
climate change law. In addition, many countries have established renew-
able energy or energy-efficiency laws (e.g., Brazil, China, India). These
laws institutionalize incentives and regulations to promote renewable
energy or energy-efficiency programs. Considering the generally accepted
best practices for a legal framework surrounding climate change,
renewable energy, energy efficiency, and SEZs, the key issue is how to
incorporate low-carbon, green SEZ components into the current legal
framework. Different countries may have different solutions. One solu-
tion is to incorporate low-carbon aspects into SEZ laws. Low-carbon ele-
ments could be required for SEZ approval and designation. Another
solution is to include a low-carbon aspect in general climate change leg-
islation. The contents of climate change legislation vary depending on
countries, but some (such as the Republic of Korea’s Low-Carbon, Green
Growth Basic Law) stipulate a basis for developing a low-carbon indus-
trial cluster or complex. More fundamentally, countries need to legally
define the meaning of “low-carbon” or “green” to prevent confusion or
overexpansion. These terms might be used frequently to determine the
beneficiaries of diverse incentives or regulations.
Regulatory Framework
According to conventional wisdom, environmental regulations could
contribute to creating markets and advancing technological innovation
versus suffocating businesses. For instance, the state of California—known
for its superior leadership in environmental performance and energy
efficiency—has pioneered one of the strongest regulations for its environ-
ment in advance of other states in the United States. Of course, regula-
tion alone cannot claim all the credit, because regulations need to be
supplemented with incentives for consumers and producers. Some of
best practices that can be applied to a low-carbon, green SEZ include
energy-efficiency standards for sectors, green building codes, climate
change impact assessment, and RPS. For utilities, RPS means that some
portion of power supply should come from renewable sources. The SEZ
authority may require that investors disclose their GHG emission estima-
tion for investment projects above a certain level, and that businesses as
well as buildings monitor and report annual GHG emission data. In a
country where comprehensive climate change mitigation measures
already are being taken, low-carbon, green SEZs could follow suit, but
could aim higher than the national average.
Incentive System
In many countries, SEZs have diverse incentive systems in place, includ-
ing corporate tax reductions or exemption; duty-free importation of raw
materials, capital goods, and intermediate inputs; no restrictions or taxes
on capital and profits repatriation; tax relief for foreign workers and
executives; exemption from most local and indirect taxes; financial
support; and so on. Also, many countries operate incentives to encourage

investment in green industry, such as renewable energy and energy effi-
ciency. Therefore, to promote low-carbon investment and actions in SEZs,
incorporating diverse incentives developed for different purposes into a
coherent low-carbon, green SEZ incentive scheme is a key issue. When
foreign investors bring in high-tech green capital equipment, intermedi-
ary parts, or materials, customs tariff and tax could be exempted.
Indonesia introduced green initiatives in April 2010, stating that it would
reduce the net tax base by 5 percent annually for the next six years on
the total investment in renewable energy. Foreign investors will receive a
lower tax rate on all dividend payments. Companies involved in construc-
tion will not be charged value added tax or import duty on machinery
and equipment used for such projects. For renewable energy and energy
efficiency for which it is hard to make the business case in the absence of
government incentives, feed-in tariffs for renewable energy investment
and tax credits for energy-efficiency investments are critical. Feed-in tar-
iff laws require mandatory purchases of renewable energy at a fixed price,
such as those in Germany, Kenya, Spain, and South Africa, producing the
highest market penetration rates in a short period. Investors consider
these laws to be the most desirable and conducive to creating local indus-
tries because of their price certainty and administrative simplicity.
Several financial incentives to consider include reducing upfront capi-
tal costs through subsidies; reducing capital and operating costs through
investment or production tax credits; improving revenue streams with
carbon credits; and providing financial support through concessional
loans and guarantees. Prioritizing R&D funds for projects in a low-carbon,
green SEZ, or mass procurement of energy-efficient green products,
could provide substantial incentives. In Uganda and Vietnam, the bulk
procurement of 1 million compact fluorescent lamps in each country
substantially reduced the cost of the lamps and improved product quality
through technical specifications and warranty; once installed, they cut
peak demand by 30 megawatts.
Institutional Framework
An institutional champion, such as a dedicated agency in charge of cli-
mate change policy, is essential to coordinate multiple stakeholders and
promote and manage relevant policy issues. In a low-carbon, green SEZ, a
dedicated department in charge of low-carbon initiatives needs to be
established inside the SEZ authority. Because low-carbon initiatives are
multidisciplinary, involving energy, environment, buildings, transportation,
and so on, such a department needs to be established as a control tower

overlooking all relevant functions. Its main mission will be to make a low-
carbon master plan, lead the implementation process, and coordinate
among different departments.
Carbon finance. A carbon-pricing mechanism is needed in developing

countries to signal that investment in high-carbon projects will yield
lower returns. This mechanism is needed to internalize externalities
regarding environmental and climate problem. The carbon market will
provide a cost-effective way to reduce emissions from MNCs and direct
investment flow to low-income countries through its offset mechanism.
Low-carbon, green SEZs can channel new source of financing through
the carbon finance mechanism and facilitate investment in climate-
friendly investment.
Using Market Instruments: Clean Development Mechanisms

Market mechanisms can encourage private investment in GHG mitiga-
tion. Although some uncertainty remains after 2012 when the first com-
mitment period under the Kyoto Protocol ends, the CDM is one of the
most prominent market instruments related to developing countries.
CDMs enable low-carbon projects in developing countries to generate
and trade carbon credits (Certified Emission Reductions, or CERs). For
instance, a German power utility may acquire CERs by investing in
renewable energy projects in Chile, or a Japanese steel company may
acquire CERs by investing new clean mitigation technology in its
Vietnamese steel projects. The CDM has triggered more than 4,000
recognized emission reduction projects since 1997 when CDM was con-
ceived by Kyoto Protocol, but a small group of middle-income countries
such as Brazil, China, India, and the Republic of Korea have dominated
75 percent of these carbon credit supplies. In the ongoing United Nations
Framework Convention for Climate Change (UNFCCC) negotiations,
the CDM reform agenda is one of the hottest topics on the table. The
debate includes such issues as how to rectify the unequal distribution of
CDM projects across developing countries and how to scale up the CDM
scheme to have a greater impact on global mitigation.
From the low-carbon, green SEZ angle, CDM provides the potential to
channel a new source of funding to develop low-carbon, green SEZs in
middle- and low-income countries. The CDM scheme could be fully
explored and utilized in many sustainable infrastructure projects. For
example, as long as credible baseline and methodologies are developed,
Table 12.1 Some Examples of CDM Projects of IDA Countries

Emission
Host country Investor Project reduction
KENYA Ormat Technologies Geothermal expansion 177,600 t CO2e/yr
(United States)
UGANDA Global Development Forum Nile electrification 36,210 t CO2e/yr
Suez, Chubu Electric Power
Co., BP Alternative Energy,
Deutsch Bank, etc.
NIGERIA Atmosfair gGmbH, Lernen- Energy-efficient fuel 31,309 t CO2e/yr
Helfen-Leben e.V. (Germany) wood stoves
replacement
SENEGAL IBRD acting as a trustee for Félou regional hydro- 188,282 t CO2e/yr
MAURITANIA the Spanish Carbon Fund power
MALI
TANZANIA Consorzio Stabile Globus Landfill gas recovery 202,271 t CO2e/yr
(Italian) and electricity
generation
Source: Compiled by authors based on data from UNFCCC.
Note: IBRD = International Bank for Reconstruction and Development; IDA = International Development Associa-
tion; t CO2e/yr = tons of carbon dioxide emissions per year.
building wind farms, deploying solar panels in buildings, changing street-

lights into energy-efficient LEDs, retrofitting old buildings into more
energy-efficient ones, improving manufacturing processes into energy-
efficient ones, and recycling wastes to generate energy could create poten-
tial CDM projects. CDM projects increasingly are expanding to
lower-income countries. Also, to overcome the limitation of individual
project-based CDM, the concept of bundling multiple projects into one
broader CDM program is being explored for scaling up.
Voluntary Carbon Market

Whereas CDM is a market mechanism based on the Kyoto Protocol,
developing countries (more accurately, non–Annex I countries without
mandatory compliance obligations according to the convention) could
explore developing a voluntary carbon market domestically. A voluntary
carbon market could be designed as a national, subnational, or private
scheme in which participating companies voluntarily reduce GHG emis-
sion and get carbon credits (but different from CERs) from the appropri-
ate authorities, and participants could trade their carbon credits. For
instance, the Republic of Korea developed a voluntary carbon market by
creating the Korea Certified Emission Reduction (KCER) program in
2005. In the national program, companies can voluntarily reduce GHG
emissions and receive KCERs after the reduction is verified by the

national authority. The Korean government provides incentives by pur-
chasing KCERs for a certain price according to a guideline. Companies
are compensated for their voluntary mitigation actions, such as investing
in clean technologies and facilities, and the program encourages other
companies to take early actions of mitigation, although they are not
obliged to do so. Through the KCER scheme, an estimated 5.6 million
tons of carbon dioxide emissions (t CO2e) was reduced by 2009. Another
example of a privately initiated voluntary carbon market is the Chicago
Climate Exchange (CCX). The CCX is a private-sector-initiated, volun-
tary cap-and-trade program with members participating voluntarily but
according to a legally binding contract. Its members represent 17 percent
of the companies in the Dow Johns Industrial Average, including Ford,
DuPont, Motorola, Sony, IBM, and Nike. Approximately 80 million
t CO2e of offset credits have been issued to date.
A low-carbon, green SEZ could become the centerpiece of voluntary
carbon market development in the country. As CDM transactions in the
SEZ gain steam, further potential to develop local voluntary carbon
market could be explored. As China’s representative low-carbon city,
Jilin City, considers establishing a carbon exchange, hosting a carbon
exchange in the low-carbon, green SEZ could promote the local carbon
market.
Synergy between FDI and CDM

Although CDM is the principal instrument for catalyzing mitigation in
developing countries, the CDM is unique in that it very much depends
on a regulatory framework because it has to go through a lengthy and
often bureaucratic approval process both domestically and internation-
ally. Only after the final approval goes through the United Nations
CDM Executive Board will CDM projects be permitted and CERs gen-
erated accordingly. Such an administrative process inherently brings the
problem of incompetent institutional capacity of developing countries
to implement CDM projects. The interlinkage and similarity between
FDI and CDM has been overlooked, however, as well as the possible
synergy to be created between them in terms of institutional capacity
building (see table 12.2). For instance, if a Danish utility company makes
FDI to build a wind farm in Cameroon through a CDM instrument, the
investment could be classified as FDI as well as CDM. Although CDM
is not the same as FDI, many of the tools and experiences developed
under the FDI regime, such as targeting, competitive analysis, marketing,
Table 12.2 Interlinkage between CDM and FDI

Project design and The structure of information required for the project design document
formulation of the CDM is the same as that required for FDI
National approval The national approval is similar to the approval given within the ambit
of the Investment Facilitating Committee
As the FDI projects, the technical review of projects can often involve
the ministries and bureaus of the relevant sector
The legal framework required for FDI would also apply to CDM
Validation/regis- For validation and registration a designated operational entity will
tration review the project design document. A validation exercise by outside
expects could also accompany many FDI-related projects.
Project financing Generally, FDI comes in based on equity shares of a company, whereas
CDM is based on projects
Monitoring/ Monitoring, verification and verification functions are carried out as
Verification/ required by EIAs or by specific requirements of particular industries
certification
Issuance of CERs CERs can be sold in the international carbon market, which will generate
additional returns for MNCs
Source: Authors.
Note: CDM = clean development mechanism; CER = certified emission reduction; EIA = environmental impact
assessment; FDI = foreign direct investment; MNCs = multinational companies.
and investor aftercare, could be used for CDM projects. One business
executive from Sierra Leone has pointed out that existing channels
handing FDI matters in developing countries could be made to handle
CDM matters as FDI and CDM are interlinked (Keili 2003).
Low-Carbon, Green SEZs around the World:

Current Status and Future Trends
Several countries are exploring ways to implement low-carbon, green
SEZs in various forms, but with the common denominator of GHG
mitigation and environmental and carbon footprint management. No
clear industry model or leadership has been established for low-carbon,
green SEZs. Some initiatives are emerging as pioneers in this area, with
some of them expanding even further into low-carbon cities or eco-
city initiatives.
Since the 1960s, a few industrial parks or cities in Europe such as
Denmark and Sweden have evolved toward eco-industrial parks (EIPs).
One of the most successful cases of EIP is the Kalundborg EIP in
Denmark. The Kalundborg industrial symbiosis (IS) was started out of
business motivation to reduce costs by seeking income-producing uses for

“waste” products. This EIP model gradually developed over decades, turn-
ing into a complex web of symbiotic interactions. In Kalundborg IS, firms
have saved US$160 million by 2001 ($15 million in annual savings), with
return on the total investment reaching $75 million in the 18 projects
established up to the end of 1998; therefore, the average payback time
for all projects was less than five years (Sakr, Baas, El-Haggar, and
Huisingh 2011). By 2001, at least 40 similar projects in the United States
and 60 in Asia, Europe, South America, Australia, and South Africa have
been initiated.
As SEZs have proven to be a successful model for China, low-carbon,
green SEZs are also drawing a lot of policy attention as low-carbon
growth pilots. A road map to transform Jilin City in northeast China to
the first low-carbon SEZ (city) is underway in a partnership between the
European Union and China, with participating institutions from U.K.’s
Chatham House, E3G and the Chinese Academy of Social Sciences,
Energy Research Institute, and Jilin University. According to the
Washington Post (November 29, 2010), China’s National Development
and Reform Commission has listed 13 cities and provinces as pilot low-
carbon areas to help reach the country’s carbon intensity target, which is
expected to feature heavily in the 12th Five-Year Plan (2011–2015).
Hangzhou, capital of East China’s Zhejiang province, for example, aims
to reduce carbon intensity by about 35 percent by 2015 and 50 percent
by 2020. India has also been quite active in rolling out its green SEZ
initiatives. India’s Ministry of Commerce put forward Guidelines for
Energy Conservation in SEZ in October 2010, which covers a wide range
of measures to push for energy efficiency, renewable energy usage and
environment management.
The Republic of Korea is also gearing up for its green growth agenda
through low-carbon cities and low-carbon SEZ initiatives. For instance,
Korea’s Incheon Free Economic Zone (IFEZ) set a new low-carbon, green
vision with its “Low Carbon IFEZ 30” Plan, and a GHG mitigation target:
30 percent reduction compared to BAU by 2020 (15 percent reduction
compared to BAU by 2014). IFEZ made a low-carbon master plan in
December 2009 and organized a “GHG Mitigation TF” to spearhead its
low-carbon strategy and plan, overarching all different departments in the
SEZ authority.
As such, concrete actions toward low-carbon, green SEZs are being
taken in these countries. Developing country GHG emissions are
expected to grow above the world average at 2.7% annually between
2001 and 2025, and surpass emissions of industrialized countries near

2018 (Source: Energy Information Administration (EIA), International
Energy Outlook, 2003). China, India, and Korea have clearly signaled that
SEZs will have a growing role as components of their low-carbon, green
growth path. As an instrument of trade and investment policy, SEZs have
played a catalytic role in processes of industrialization, diversification and
trade integration in developing countries. It is expected that SEZs will
evolve to continue to play a similar role in low-carbon and green growth
with more and more countries following suit to incorporate this new
approach into their development models.
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Index
A B
Adamjee EPZ, Bangladesh, 28 Bahrain, 257
Adapting Singapore Experience Office, 108 Bangladesh EPZs (BEPZs)
ADOZONA (Dominican Association of background, 25–26
Free Zones), 166, 172, 173, 175 challenges faced by
AFTA (Association of Southeast Nations diversification of the industrial
(ASEAN) Free Trade Area), 133 base, 41
Agreement on Subsidies and reform of existing regime, 41–43
Countervailing Measures (SCM), wage and conditions
WTO, 172 competitiveness, 38–40
Algeria-China Jiangling Economic and country overview, 9–10
Trade Cooperation Zone, domestic market linkages, 31–33
79–80, 92 Economic Zones Act, 26, 42, 43
Amapala Free Zone, Honduras, 48 employment, 31
Andean Community, 133 exports, 30–31
apparel sector female share of employment,
Bangladesh garment industry, 26 31, 257
in the Dominican Republic, 160, firms and investment, 29–30
168–169, 170f, 173 garment industry status, 26
labor laws and women, 264 historical development of, 27–29
in Mauritius, 232, 233f key success factors
ASEAN (Association of Southeast administrative regime efficiency, 36
Nations), 41, 133 incentives, 36–38
Asian Development Bank, 286 investment climate, 34–35
Association of Southeast Nations market size, 34
(ASEAN) Free Trade Area serviced land and infrastructure,
(AFTA), 133, 150 35–36
Australia, 133–134 wages, 34
309
310 Index
Bangladesh EPZs (BEPZs) (continued ) Chambishi multi-facility economic

labor law compliance, 265 zone, 73–74
labor laws and women, 263 Chicago Climate Exchange (CCX), 303
local market restrictions, 33 China
private EPZ, 42 African SEZs (see China’s overseas SEZs)
sectoral distribution of female current status of green SEZs, 306
employment, 260 female share of employment, 258
Bangladesh Export Processing Zone flexibility of employment
Authority (BEPZA), 27, 265 for women, 262
Bangladesh Investment Climate Singapore EPZ (see China-Singapore
Fund (BICF), 38 (Suzhou) Industrial Park)
Bangladesh Small and Cottage Industries China-Africa Development Fund
Corporation (BSCIC), 27 (CADF), 70, 74
Beranger, Paul, 228 China-Africa Investment Ltd., 79
Better Factories Programme, China Civil Engineering Construction
Cambodia, 265 Corp. (CCECC), 78
Border Industrialization Program, China-Nigeria Economic and Trade
Mexico, 252 Cooperation Zone, 78
BSCIC (Bangladesh Small and Cottage China Nonferrous Mining Co.
Industries Corporation), 27 (CNMC Group), 73
China Pakistan Enterprise Zone, 86
China-Singapore (Suzhou) Industrial
C
Park (SIP)
CACM (Central American Common aligning interests of stakeholders,
Market), 133 113–114
CADF (China-Africa Development background, 101–102
Fund), 70, 74 competition from neighboring industrial
CAFTA (Central American Free parks, 111–112
Trade Agreement), 176 competitive advantage issues, 112
Cambodia, 199 current situation, 102–104
carbon emissions customs handling support, 115
financing, 301 development and operations lessons, 119
policy incentives and development costs challenges, 110–111
regulations, 297, 298f economic indicators, 121t
voluntary market, 302–303 employee pension fund system, 114–115
Caribbean Basin Economic Recovery Free Trade Zone development
Expansion Act (CBI II) milestones, 116–117
(1990), 56, 176 government leadership, 114
Caribbean Basin Initiative (CBI), 55–56 key success factors, 113
Caribbean Basin Trade Partnership Act knowledge-sharing process, 107,
(CBTPA), 49, 56, 176 109–110, 119–120
CCECC (China Civil Engineering macroeconomic challenges, 112–113
Construction Corp.), 78 misalignment of government and
CDM (clean development mechanisms), stakeholder incentives, 111
301–302 partnership structure, 105–107, 108f,
CEMAC (Economic and Monetary 117–119
Community of Central Africa), 134 policy incentives, 114
Central American Common Market political and economic strategies,
(CACM), 133 104–105
Central American Free Trade Agreement timeline and major milestones, 122–124
(CAFTA), 176 training for officials, 109
Index 311
China-Singapore Joint Steering Council CIC (Investment Climate Advisory

(JSC), 105 Services), 148–149
China-Singapore Suzhou Industrial Park Ciudat Guayana, Venezuela, 211
Development Co., Ltd. (CSSD), clean development mechanisms
102, 106 (CDM), 301–302
China’s overseas SEZs Closer Economic Relations
Algeria-China Jiangling, 79–80, 92 Agreement (Australia and
background, 11, 70–71 New Zealand), 133–134
benefits for African economies, 95 CNMC (China Nonferrous Mining
benefits for Chinese enterprises, 95 Co. Group), 73
current situation, 72–73 CNZFE (Consejo Nacional de Zonas
developers disappointment with Francas de Exportación), 164
government support, 94 CODEVI FZ, Dominican Republic, 174
development and management, 87–89 Comilla EPZ, Bangladesh, 28
domestic concern about Chinese ComMark Trust, Lesotho, 271
investment, 94–95 Common Market for Eastern and Southern
dual-track strategy for ERZs Africa (COMESA), 133, 150
background to SEZs, 217–218, 222 Consejo Nacional de Zonas Francas de
economic results, 218–219 Exportación (CNZFE), 164
privatization support, 220 Copenhagen Accord, 283, 284,
reduction in opportunities for rent- 290, 294, 296
seeking, 219–220 coproduction, 174
transforming of the rent-distorted Costa Rica, 191
economy, 219 CSSD (China-Singapore Suzhou
Egypt Suez, 74–76, 88–89, 90, 92 Industrial Park Development
enterprise interest in the zones, 91–92 Co., Ltd.), 102, 106
enterprise requirements, 89–90 CS-SIP Land Corporate, 107
establishment process, 80–81
Ethiopia, 76–77, 88, 91, 92
D
experience to date, 70, 91–92
financing challenges, 92 Daewoo Company, 27
history, 71–72 Decent Work Programme, ILO, 270–271
investments structure, 84–85t DEDO (Duty Exemptions and Drawback
labor requirements, 90–91 Office), Bangladesh, 33
Mauritius Jinfei (see Mauritius Dhaka EPZ, Bangladesh, 28, 31,
Jinfei Economic and Trade 35, 40, 260
Cooperation Zone) Doha Round, 130
Nigeria Lekki, 78–79, 87–89, 90 Dominican Association of Free Zones
Nigeria Ogun-Guangdong, 79, 92 (ADOZONA), 166, 172, 173, 175
objectives, 69, 71, 222 Dominican Republic-Central American
partnership framework elements, 95–96 Free Trade Agreement
strategy and financial (DR-CAFTA), 49, 56, 176
commitments, 83–87 Dominican Republic’s free zones
support mechanisms, 82–83 apparel sector, 160, 168–169, 170f, 173
tender process, 81–82 background, 162–166
Zambia-China, 73–74, 88–90, 91 backward linkages failures, 178, 194
zones list, 96–97t compatibility issues with
Chinese CCNC Group, 79 WTO, 171–172
Chittagong EPZ, Bangladesh, 28, competitiveness challenges, 165–166
31, 35, 40 country overview, 14–15
Choloma free zone, Honduras, 48 current situation, 164, 175–176
312 Index
Dominican Republic’s free goal of, 213

zones (continued ) Madagascar, 209
employment, 171 Malaysia, 216–217
exports, 168–171 Mauritius, 214–216
factors driving early growth, 163–165 need for a prozone political
failure to integrate with the local coalition, 213
economy, 177–178 rent cycling issues, 207–208
forward linkages promotion Sub-Saharan Africa role, 220–224
initiatives, 173 East African Community
impact on economic growth, 165 (EAC), 133, 138, 142,
impact on GDP and FDI growth, 148–149, 150
159–160, 166–167, 167f Eastern High-Tech Industrial Zone, SIP, 102
investment, 167–168 ECCI (Egypt-Chinese Corporation
job creation, 179 for Investment), 74
labor force training and wages, 178–179 Eco-industrial Park Handbook, 286
labor laws and women, 264 eco-industrial zones/parks (EIZ/Ps),
overreliance on trade 286, 304–306
preferences, 176–177 Economic and Monetary Community of
policy reforms attempted, 161 Central Africa (CEMAC), 134
production sharing, 174 Economic Community of West African
profile, 164 States (ECOWAS), 150
recent decline in, 166 Economic Zones Act (2010), Bangladesh,
structural upgrades shortcomings, 26, 42, 43
173, 175 EDB (Singapore Economic Development
threats to the FZ-based economic Board), 107
model, 160–161 EFTA (European Free Trade
wage incentives, 172–173 Association), 133
DR-CAFTA (Dominican Republic-Central Egypt-Chinese Corporation for Investment
American Free Trade Agreement), (ECCI), 74
49, 56, 176 Egypt Suez Economic and Trade
DuShu Lake Innovation District of Science Cooperation Zone, 74–76,
and Technology, SIP, 102 88–89, 90, 92
Duty Exemptions and Drawback Office EIPs (eco-industrial zones/parks), 286,
(DEDO), Bangladesh, 33 304–306
Duval, Gaëtan, 228 energy service companies (ESCOs), 296
Enterprise Mauritius, 234
Environmental Management
E
System, ISO, 285
Early Reform Zones (ERZs) environment compliance zone, 285
Asian zone performance statistics, 212t EPZDA (Export Processing Zone
basis of failures of SEZs, 208 Development Authority),
China’s dual-track strategy, 217–220 Mauritius, 234
compared to growth poles, 211 ESCOs (energy service companies), 296
compared to SEZs, 210 Ethiopia Eastern Industrial Park, 76–77,
concept of, 15–16 88, 91, 92
creation of competitive European Economic Community, 133
enterprises, 212–213 European Free Trade Association
criticisms of, 211–212 (EFTA), 133
dual-track reform strategy role, Export Processing Zone (EPZ) Act,
208–209, 210–211 Bangladesh, 38
failure of Africa’s, 209 Export Processing Zone (EPZ) Act,
fundamental objective, 210 Mauritius, 228
Index 313
Export Processing Zone (EPZ) Law, Foundation for Investment and

Honduras, 48–49, 55 Development of Exports
Export Processing Zone Development (FIDE), 58–59
Authority (EPZDA), Mauritius, 234 free trade agreements (FTAs), 130
Free Zone Law, Dominican Republic, 172
Free Zone Law, Honduras, 48
F
Fruit of the Loom, 54
Factory Improvement Program, ILO, 271 Fund for the Promotion of Exports
Fair Labor Association, 264 and Investments, Dominican
Fat, Lim, 228 Republic, 173
feminization of labor
advantages for employers, 249
G
beginnings of link between trade
and gender, 248 garment industry. See apparel sector
defeminization of employment factors GCC (Gulf Cooperation Council),
cyclical economic influences, 268–269 133, 150
gender wage gap, 267–268 gender dimension of SEZs. See
industrial upgrading, 266–267, 268f feminization of labor
outsourcing to home-based General Agreement on Tariffs and
workers, 269 Trade (GATT), 129
economics of female-intensive Ghana, 259
production, 253–255 Gildan, 54, 65
exports and employment, 255–256 green house gas (GHG) mitigation
factors attributed to, 251 target, 288–291
female share of employment, green SEZs. See low-carbon, green SEZs
31, 257–259 growth poles, 211
female wages as a percent of male Grupo M, 160, 174
wages, manufacturing, 250t Guangdong Xinguang International
flexibility of employment, 262 Group, 79
gender wage inequality’s relationship Gulf and Western Corporation, 162
to growth, 249–250 Gulf Cooperation Council
initiatives to improve compliance on (GCC), 133, 150
labor issues, 265–266
labor laws and women, 263–264
H
policy conclusions and
recommendations, 270–272 Haier, 72, 83–84, 86
pros and cons of, 248–249, 269–270 Haiti, 173, 174
restrictions on unions and, 264 Hanes, 54
sectoral distribution of female Honduras free zones
employment, 259–261 background, 47–48, 65–67
segmentation of occupations challenges faced by
by sex, 251 crime, 62
SEZs role in, 17–18, 252–253 efforts to increase productivity, 62
wages and working conditions, 262–265 existing privileges discouragement of
FIDE (Foundation for Investment and reform, 64
Development of Exports), 58–59 global economic downturn, 61
FINEX technology, 296 international competition, 62
Foreign Investment (Promotion and macroeconomic climate, 61–62
Protection Act) (1980), product diversification, 63–64
Bangladesh, 27, 37 vocational training, 64, 65
Forum on China-Africa Cooperation employment, 53–54
(FOCAC), 70 female share of employment, 257
314 Index
Honduras free zones (continued ) steps in building an innovative SEZ

firms and investment, 49, 51t, 52 infrastructure and business
historical development of, 48–49 environment development,
incentives summary, 50–51 197–198
key success factors labor-intensive manufacturing
agglomeration support, 57–58 development, 198–199
domestic investors attracting staged approach summary, 201t
of FDI, 60 technology-intensive manufacturing
domestic private sector, 59–60 development, 200
infrastructure and services support, 57 strategic location importance, 196–197
institutional support in marketing and training programs and, 190, 190t
promotion, 58–59 transmission of foreign
legal framework, 55 knowledge and technology,
preferential trade agreements, 55–57 187–188
labor laws and women, 263 Instituto Politécnico Centroamericano, 65
local market linkages, 54 Integrated Free Trade Zone (IFTZ),
overview, 10–11 SIP, 102, 115
production and exports, 52–53 Interamericana Products International, 160
International Finance Corporation
I (IFC), 40
Investment Climate Advisory Services
IFC (International Finance
(CIC), 148–149
Corporation), 40
Ireland
Incheon Free Economic Zone,
feminization of labor, 252
Republic of Korea, 289
first modern SEZ, 186, 195
India
Ishwardi EPZ, Bangladesh, 28
current status of green SEZs, 306
female share of employment, 257, 258
flexibility of employment J
for women, 262 Jamaica, 257
Indonesia, 147 Japan International Cooperation Agency
Industrial Relations Ordinance (1969), (JICA), 70
Bangladesh, 38 Jiangling Free Trade Zone, 76, 79–80.
INFOTEP, 175, 179 See also Algeria-China Jiangling
innovation support through SEZs Economic and Trade
background, 183–184 Cooperation Zone
backward linkages facilitation JinFei. See Mauritius Jinfei
need, 192, 194–195 Economic and Trade
business climate reform Cooperation Zone
requirement, 196 Jinji Lake-Rim Central Business
direct and indirect benefits, 184–185 District, SIP, 102
domestic technological capabilities JSC (China-Singapore Joint Steering
requirement, 189–192 Council), 105
evolution of first modern SEZ, 186 Jurong Town Corporation (JTC), 105
FDI flows as a source of technology
and learning, 188
K
influence derived from local-level
concentration, 188–189 Kandla, India, 196
labor circulation enhancement need, 195 Karnaphuli EPZ, Bangladesh, 28
policies summary, 202t Kenya
R&D capacity and personnel female share of employment, 259
requirement, 190, 192, 193f regional trade agreements in, 142–143
Index 315
Korea Certified Emission Reduction M

(KCER), 303
Madagascar
Kunshan Economic and
EPZs success, 209
Technological Development
labor laws and women, 263, 264
Zone, 111
sectoral distribution of female
Kyoto Protocol, 301, 302
employment, 260
Madras EPZ, India, 262
L
Malaysia
labor growth triangle, 147
Bangladesh’s cost advantage, 34, 38 sectoral distribution of female
gender dimension of (see feminization employment, 261
of labor) shift from resource to skill-driven
innovation in SEZs and, 195, 198–199 development, 216–217
requirements in China, 90–91 training for workers in SEZs, 191t
training and wages in Dominican maquila, 48. See also Honduras free zones
Republic, 178–179 Maquila Association of Honduras, 61
women and laws, 263–264 Masan Zone, Republic of Korea
Labor Counselor Program, Bangladesh, 38, defeminization of employment
40, 265, 271 factors, 268
La Ceiba free zone, Honduras, 48 labor circulation enhancement, 195
Lagos, Nigeria, 78 Mauritian Labor Party, 228
La Romano Zone, Dominican Mauritius Export Development and
Republic, 162 Investment Authority
Lekki Free Trade Zone (LFTZ), Nigeria, (MEDIA), 234
78–79, 90, 92, 93 Mauritius Export Processing
Lesotho, 259, 265 Zone (MEPZ)
low-carbon, green SEZs apparel sector dependency, 232, 233f
basic policy framework, 297–298 background and objectives, 227–229
carbon finance, 301 contribution to political
clean development mechanisms, stability, 241, 242
301–302 diversification and competitiveness
climate-friendly investment challenges, 236–237
generation, 294–297 dual-track SEZ success, 214–216
core components overview, 287–288 economic crisis and restructuring
current status worldwide, 304–307 history, 229–230
defined, 285–286 employment demographics, 230–231
GHG mitigation target, 288–291 export-oriented approach
incentive system, 299–300 results, 237–238
institutional framework, 300–301 export performance, 231, 232f
international agreements, 283–284 export productivity, 233–235
legal framework, 298–299 FDI challenges, 235
low-carbon policy incentives and future prospects, 241–243
regulations, 297, 298f government leadership role, 238–239
new focus on green zones, 284–285 investment data, 231, 233–235
potential benefits of, 286–287 labor and operating cost
regulatory framework, 299 structure, 235–236
sustainable infrastructure, 291–294 labor productivity, 232, 233f
synergy between FDI and overview, 16–17
CDM, 303–304 phases in its economic history, 241
voluntary carbon market, 302–303 political economy impact, 239–240
Lusaka subzone project, Zambia, 74 preferential trade agreements, 236
316 Index
Mauritius Export Processing New Zealand, 133–134

Zone (MEPZ) (continued ) Nicaragua, 257
sectoral distribution of female Nigeria Lekki Economic and Trade
employment, 261 Cooperation Zone
static versus dynamic impact, 240–241 background, 78–79
training for workers in SEZs, 191t Chinese workers employed, 90
Mauritius Industrial Development development and management, 87–88
Authority, 234 female share of employment, 259
Mauritius Jinfei Economic and Trade foreign investors requirement, 89
Cooperation Zone Nigeria Lekki Free Trade Zone (LFTZ),
background, 77–78 78–79, 90, 92, 93
Chinese workers employed, 90–91 Nigeria Ogun-Guangdong Economic
development and management, 87, 88 and Trade Cooperation
foreign investors requirement, 89 Zone, 79, 92
investment incentives, 86–87 Noida EPZ, India, 262
zone status, 91 North American Free Trade Agreement
McKinsey cost curve, 294, 295f (NAFTA), 56, 133, 138, 176
MEDIA (Mauritius Export Development
and Investment Authority), 234 O
Mercosur, 141, 142
Ogun-Guangdong Economic and Trade
Mexico
Cooperation Zone, 79, 92
defeminization of employment
Omoa Free Zone, Honduras, 48
factors, 268
Organisation for Economic
feminization of labor, 252
Co-operation and Development
labor laws and women, 264
(OECD), 186
regional trade agreements in, 141, 142
Overseas Private Investment
MFA (Multi-Fiber Arrangement), 6
Corporation (OPIC), 38
MIGA (Multilateral Investment Guarantee
Agency), World Bank, 38
P
mining and ERZs, 222–223
Ministry of Commerce, China Panapak Electronics, 86
(MOFCOM), 73, 81, 83, 86 Parti Mauricien Social Democrate
MMM (Mouvement Militant (PMSD), 228
Mauricien), 228 Philippines
Mongla EPZ, Bangladesh, 28 labor laws and women, 264–265
Morocco, 257 training for workers in SEZs, 191t
Mouvement Militant Mauricien Pingxiang Coal Group (PKCC), 80
(MMM), 228 PMSD (Parti Mauricien Social
Multi-Facility Economic Zones (MFEZs), Democrate), 228
Zambia, 74 pollution control zone, 285
Multi-Fiber Arrangement (MFA), 6 Poncini, José, 228
Multilateral Investment Guarantee Agency POSCO, 296
(MIGA), World Bank, 38 Presidential Table for the Promotion
of Exports, Dominican
N Republic, 175
Private EPZ Act (1996), Bangladesh, 42
NAFTA (North American Free Trade
production sharing, 174
Agreement), 56, 133, 138, 176
Puerto Cortés free zone, Honduras, 48
Nanjing Jiangning Development Zone,
Nigeria, 83
Q
National Productivity and Competitiveness
Council (NPCC), Mauritius, 234 Qiyuan Group, 76, 77
Index 317
R sectoral distribution of female

employment, 261
Ramgoolam, Seewoosagur, 228
training for workers in SEZs, 191t
Regional Industrial Parks Initiative,
Ruba General Trading Company, 86
Singapore, 104
rules of origin, 139
regional trade agreements (RTAs)
Russia, 213
in Africa and the Middle East, 132f
Asian growth triangles, 147–148
S
benefits to member countries, 129–130
challenge of incorporating SACU (Southern African Customs
SEZs into, 128 Union), 143
competitiveness of local producers, 136 SADC (Southern African Development
competitive positioning of SEZ, 137 Community), 143, 150
EAC export processing zones, 148–149 SAFE (Security and Accountability for
evolution of intra-RTA trade, 135f Every Port), 57
factors determining effectiveness of, 134 San Pedro Sula, Honduras, 58
financial incentives, 145–146 SCM (Agreement on Subsidies and
growth in number of, 130, 131f, 132 Countervailing Measures),
in Kenya, 142–143 WTO, 41, 172
in Mexico, 141 Sectoral Promotion Program, Mexico, 141
performance, 133–134, 135f Security and Accountability
policy trends, 133 for Every Port (SAFE),
promotion of regional economic Honduras, 57
integration, 136–137 Shannon, Ireland, 186, 195
regulations and handbooks Shannon Free Airport Development
available, 150 Company (SFADCo), 186
regulatory framework, 144–145 Shanxi Coking Coal Group, 77
in SADC, 143 Shenzhen, China
strategic framework, 146–147 backward linkages facilitation, 192
synergies with SEZs, 127–128 business climate reform, 196
tariff-reduction purpose, 129 female share of employment, 259
tariff-related issues response, flexibility of employment
138–139, 140f for women, 262
tariff-related measures labor circulation enhancement, 195
summary, 151–153t labor-intensive manufacturing
trade triangulation, 136 development, 198
in Uruguay, 141–142 staged approach summary, 201t
rent cycling technology-intensive manufacturing
dual-track strategy that development, 200
addresses, 219–220 training for workers in SEZs, 191t
issues in ERZs, 207–208 Singapore. See China-Singapore (Suzhou)
Republic of Korea Industrial Park
awareness of emissions issues, 284 Singapore Economic Development Board
backward linkages facilitation, 194 (EDB), 107
current status of green SEZs, 306 Singapore-Suzhou Township
defeminization of employment Development Co., 106
factors, 268 SIP. See China-Singapore (Suzhou)
EPZ in Bangladesh, 284 Industrial Park
GHG mitigation target, 289 SIPAC (Suzhou Industrial Park
innovation support in SEZs, Administrative Committee), 106
190, 192, 193f SIP Ecological Science Hub, 102
labor circulation enhancement, 195 SIP Provident Fund System (SPF), 114
318 Index
Software Project Office (SPO), Suez Economic and Trade Cooperation

Singapore, 108 Zone, 74–76
South Asian Free Trade Agreement sustainability in SEZs. See low-carbon,
(SAFTA), 133 green SEZs
Southern African Customs sustainable infrastructure in a SEZ
Union (SACU), 143 buildings, 292–293
Southern African Development energy efficiency, 292
Community (SADC), 143, 150 energy supply, 291–292
special economic zones (SEZs). See also waste reuse and recycling, 293–294
specific countries Suzhou. See China-Singapore
areas for growth opportunities, 15 Industrial Park (SIP)
benefits, 8–9 Suzhou Industrial Park Administrative
challenges faced, 6 Committee (SIPAC), 106
critical policy issues, 7 Suzhou New and Hi-Tech Development
early reform zones concept, 15–16 Zone, 111, 112, 113
elements needed to achieve dynamic Suzhou Taihu National Tourism and
economic benefits, 13–14 Vacation Zone, 111
environmental policy and, 18–19
ERZs and (see Early Reform Zones) T
exports and employment, 255–256
Taiwan, China
gender dimension of labor (see
labor circulation enhancement, 195
feminization of labor)
growth in number of new zones, 5–6
employment, 261
innovation support from (see innovation
technology-intensive manufacturing
support through SEZs)
development, 200
lessons in zone development, 11–12
policy objectives, 3–4
Taiyuan Iron and Steel Company, 77
regulatory issues overview, 12–13
Tanzania, 259
role in economic growth, 4–5
tariff-jumping, 128
role in international trade, 3
TEDA (Tianjin Economic-Technological
RTAs and (see regional trade
Development Area) Investment
agreements)
Holdings, 74, 83
shift away from traditional model, 6–7
Tela free zone, Honduras, 48
success factors, 10
Temporary Importation Regulations
success record, 4
Law, Honduras, 48
types and definition, 1, 2t, 3
Textile Emergency Support Team,
Special Fund for Economic and
Mauritius, 234
Technological Cooperation, 82
Thailand, 147, 191t
SPF (SIP Provident Fund System), 114
Tianjin Economic-Technological
Sri Lanka
Development Area (TEDA)
Investment Holdings, 74, 75–76, 83
employment, 260–261
Tianli Group, 77
township and village enterprises (TVEs),
Sub-Saharan Africa and SEZs. See also
China, 218
Early Reform Zones
Tunisia, 261
agglomeration spillover effects, 221
twin-planting, 174
economic benefits of approach, 220–221
economic reforms possible, 223–224
U
objectives for Chinese economic
zones, 222 UEMOA. See West African Economic
policy options involving mining, 222–223 and Monetary Union
Index 319
U.K. Ethical Trade Initiative, 265 Y

United Nations Convention on Climate
Yangcheng Lake Tourism
Change, 283
Resort, SIP, 102
United Nations Framework Convention for
Yangyang Asset Management, 76
Climate Change (UNFCCC), 301
Yonggang Group, 76, 77
Uruguay, 141–142
Youngone Corporation, 28, 42
U.S. Apparel Industry Partnership, 265
Uttara EPZ, Bangladesh, 28
Z
V Zambia-China Economic
and Trade Cooperation
Vietnam, 263
Zone
Vishakhapatnam SEZ, India, 262
background, 73–74
voluntary carbon market, 302–303
Chinese workers employed, 90
development and management, 88
W
foreign investors requirement, 89
West African Economic and Monetary zone status, 91
Union (WAEMU), 138, 150 Zhangjiagang Bonded Area, 111
women and SEZs. See feminization of labor Zhangjiagang Free Trade Zone, 77, 83
Workers Association and Industrial Zhongding International
Relations Act (2004), Group, 79–80
Bangladesh, 38 ZOLI, Puerto Cortés, Honduras, 59
World Bank, 38, 40, 148, 213, 229, 296 Zona Industriales de Procesamiento (ZIPs),
World Trade Organization (WTO), 26, 41, Honduras, 49
112, 129, 130, 172, 213–214 zonas francas especiales (ZFEs), 165
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It is more than 50 years since the establishment of the first modern special economic zones
(SEZs). Over this time, SEZs have been credited with underpinning the dramatic export-
oriented growth of China and other East Asian countries. But their success has been uneven,
and they have remained controversial from a trade, fiscal, and social policy perspective.
Yet policy makers appear to be increasingly attracted to economic zones. Since the mid-1980s,
the number of newly-established zones has grown rapidly in almost all regions, with dramatic
expansion in developing countries. In parallel with this growth, and in the evolving global
trade and investment context, zones are also undergoing significant change in both their form
and function, with traditional export processing zones (EPZs) increasingly giving way to larger
and more flexible SEZ models. This will bring opportunities for developing countries to better
take advantage of the dynamic potential of zones, but will also raise new challenges to their
successful design and development.
This collection of papers aims to contribute to an improved understanding of the role and
practice of SEZs in developing countries, in order to better equip policy makers in planning
and implementing SEZ programs. Organized around three broad themes—attracting
investment and creating jobs, facilitating dynamic benefits, and ensuring sustainability—
this book addresses many of the emerging issues and challenges in SEZs with practical case
examples from SEZ programs in developing countries, including China, the Dominican
Republic, Bangladesh, Honduras, and Mauritius.
The World Bank’s International Trade Department produces and disseminates policy-
oriented knowledge products and forges partnerships on trade to advance an inclusive
trade agenda for developing countries and to enhance developing countries’ trade
competitiveness in global markets. Learn more about the World Bank’s trade portfolio
at: www.worldbank.org/trade.
ISBN 978-0-8213-8763-4
SKU 18763

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Attracting Investment and Creating

PART I Attracting Investment and Creating

Chapter 3 Success and Stasis in Honduras’ Free Zones 47

Chapter 4 China’s Investment in Special Economic

China’s Overseas Special Economic Zones:

Chapter 5 Partnership Arrangements in the China-Singapore

Chapter 6 SEZs in the Context of Regional Integration:

PART II Moving from Static to Dynamic Gains:

Chapter 8 Fostering Innovation in Developing Economies

Chapter 9 Early Reform Zones: Catalysts for Dynamic

Chapter 10 Planned Obsolescence? Export Processing

PART III Social and Environmental Sustainability:

Chapter 12 Low-Carbon, Green Special Economic

Low-Carbon, Green SEZs around the World:

2.3 Comparison of Average Wages and Benefits of

11.3 Female Share of Employment in SEZs by Sector,

11.1 Female Wages as a Percentage of Male Wages in

Other Contributing Authors

Jean-Marie Burgaud Independent Consultant, trade and economic

ADOZONA Dominican Association of Free Zones

CNZFE Consejo Nacional de Zonas Francas de Exportación

JSC China-Singapore Joint Steering Council

SPF SIP Provident Fund System

Table 1.1 Summary of Types of Zones

demarcated geographic areas contained within a country’s national bound-

1. To attract foreign direct investment (FDI): Virtually all zones programs,

2. To serve as “pressure valves” to alleviate large-scale unemployment: The

In achieving these objectives, SEZs have had a mixed record of success.

launched SEZs on a scale not seen previously, provided a platform for

services like information and communication technology (ICT) and bio-

Using this framework, the book is organized in three parts. Part I:

Attracting Investment and Creating Jobs:

Beyond the wage-based advantages of Bangladesh, the critical contri-

outside the garment sector. Specifically, it relies on investors that are

role in addressing often-difficult land issues, facilitating the provision of

one particular regulatory issue—the growing importance of regional

Moving from Static to Dynamic Gains:

exemptions on minimum wage and labor rights (rather than addressing

economies have entrenched patronage systems that undermine reform,

suggests some life cycle of traditional EPZs, the instruments on which

Social and Environmental Sustainability:

concentration of female workers due to prevailing social and cultural

discuss in chapter 12, the concept of developing low-carbon “green”

United Nations Centre on Transnational Corporations-International Labour

Attracting Investment and Creating

The Thin End of the Wedge:

Historical Development of EPZs in Bangladesh

Table 2.1 Summary of EPZs, 2009

Similarly, the Comilla Zone—located on the Dhaka-Chittagong

Firms and Investment

Of the active companies operating in the EPZs, nearly two-thirds are

Table 2.2 Operating Enterprises in the EPZs by Sector,

Figure 2.1 Exports (US$ millions) and Contribution to National Exports

exports (left axis) contribution to national exports (right axis)

contribution to national exports peaked at more than 18 percent in

Domestic Market Linkages

Figure 2.2 Employment Generation in EPZs (Year-Wise and Cumulative)

new jobs cumulative jobs